ECB Looks More Aggressive to Markets: Posen

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Nov. 25 (Bloomberg) -- Adam Posen, President of the Peterson Institute For International Economics, discusses ECB policy and how the central bank is viewed by the markets. He speaks on Bloomberg Television's “The Pulse.” (Source: Bloomberg)

Timelines.

We have these stress tests of the banking sector, which is a critical element of the evolution of the eurozone in terms of its structure.

At the same time, we have a desire given the inflation numbers that are taking through, to do more on monetary policy.

The two stories interact.

This is the case with everything in macro prudential policy.

You are trying to work on keeping the financial system as a whole more stable.

That usually involves some restraint on lending or indirectly through raising capital and liquidity requirements.

At the same time, you want to move policy.

You want to have separate tools for each.

That is the idea.

Bank of england is set up to do that.

The federal reserve came out and said they want more tools because of that.

The ecb is the best shot at having separate tools because the aqr remains to be done.

That sends a strong market signal that nobody wants to be left out and say, you didn't provision enough.

That is working.

The question is, does that give more reason for the ecb governing council to try to ease?

In my opinion, yes.

I think peter and the others said so.

What do they do?

There would be a deposit rate cut potentially.

That is quite likely.

Talk about an ltro is strange because it allows them to temporarily dump off bad assets.

If it is short and it doesn't really do anything.

We have not seen the same kind of liquidity premium on european banks as three years ago.

To me, i think the next thing to think about is directly addressing the divergences in credit conditions, what they refer to as interference.

That is shorthand for, no small business credit in southern europe.

There are the issue of, will they do any purchasing?

I think the bottom line is, you are seeing an ecb that is going to suddenly look more to markets , more aggressively anti- deflation that may have been, more actively listening than they have been.

How do they do that?

How did he become more aggressive?

You already have a split.

There are those on the governing council that have issues already.

How do you convince the market that you are actually going to walk the walk?

We have seen a lot of talking, but we need to see some walking.

I think cutting the rate will make a much bigger impact in european context than in the american context.

I think the deposit rate is going to make a much bigger impact in europe than in the u.s. context for three reasons.

It is going to send a signal that draghi and the consensus on the committee isn't going to be held hostage for those not wanting to act.

That in itself will be a big message.

It is like a year-and-a-half ago.

Second, it will be working through a banking system that is a much bigger part of the economy than in the u.s.. in the u.s., there are alternative forms.

You have got some moving with the deposit rate.

Third, they simply don't know what to do.

There is more of a sense that there is pent-up demand for the ecb to do something.

So i think the first step has to be the deposit rate cut even if it is not that big.

I think it could happen as early as january.

They want to be out in front.

If a yellen fomc is going to be much more easy, the ecb wants to be up front.

You mentioned oil prices, another potentially deflationary drag on the european economies.

The news in france is very bad.

The news in a lot of places is operated.

A little good news on german industrial orders, but that hasn't done enough to pull up the rest of the economy.

This time next year, how strong?

Sterling is going to be up that i fear it will be as temporary as the housing price boost.

For the time being, you have the bank of england, governor carney saying we are going to exceed everybody's expectations of growth.

They are not going to be doing the kind of deposit rate cut in both the fed and the ecb.

Growth news is going to be surprisingly on the upside.

You september early twice there.

I don't view this as a sustainable recovery.

I view 1.5% of the growth rate relying on fundamentals and the rest being this bubble.

How long will the recovery last for?

If we have enough oligarchs and people wanting to get their money out of unstable governments, it could last for a while.

If there aren't too many losses come it could go for a while.

How long is that?

18 months, 24 months?

We are locked and loaded for a starving crisis.

We have nice big booms but -- danny may be right.

I wouldn't say locked and loaded but i see the potential.

To me this is just repeating the run-up to the bubble of asset prices in housing in the u.k. that we saw in the early crisis years.

I don't see the point since it is not turning into increased supply.

We are seeing loan devaluing ratios going down.

Where the hell is the fpc of the bank of england which should be countering this?

They said they are not going to touch for another year.

I don't agree on that.

I think there is instability here.

The policy mix at the moment -- if you look at the way the arrows aren't directing -- are interacting that avbbe has put in place, they are not delivering yet.

I think people tend to be a little unfair.

I don't mean they are being nasty, but i think the expectations are too high.

The monetary policy is delivering what it is supposed to be.

One of the key facts that people are missing is that most of the growth has been in nontraded goods.

It has been in domestic services.

It is not just an export cheapening yen story.

The key thing is that the government is doing the nexus very tax hike on that -- necessary tax hike on the consumption tax.

That is ok if it is temporary but it would be better if there were wage increases in early 2014. since japanese corporate sector is benefiting hugely over the last year, they should give sizable wage increases.

We will see if they do it.

Adam, it has been a pleasure.

Thank you very much indeed.

Coming up, another exclusive interview.

We spoke with the ceo of euro's

This text has been automatically generated. It may not be 100% accurate.

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