Cen­tral Banks Los­ing Fire­power: ECB Exec

ECB ex­ec­u­tive board mem­ber Yves Mer­sch warns of di­min­ish­ing re­turns in cen­tral bank ac­tion

The Economic Times - - Gold Returns As Much As Sensex Over Last 15 Years -

Lon­don: Cen­tral banks’ ex­tra­or­di­nary mea­sures to spur growth may even­tu­ally show di­min­ish­ing re­turns while a key part of the Euro­pean Cen­tral Bank’s quan­ti­ta­tive eas­ing pro­gramme car­ries a “cer­tain risk” that has been mit­i­gated, ECB Ex­ec­u­tive Board mem­ber Yves Mer­sch said.

Mer­sch, in a speech to the Am­brosetti Work­shop in Cer­nob­bio Italy, on Satur­day, re­viewed the var­i­ous pol­icy in­stru­ments that the ECB and other cen­tral banks have used to aid eco­nomic re­cov­ery.

“When weight­ing the ‘ben­e­fit,’ though, one may con­sider that as the us­age of these in­stru­ments is ex­panded to very high pro­por­tions, they may start to dis­play di­min­ish­ing re­turns at some point,” Mer­sch said in the speech.

Since the ECB last month cut rates to record lows and added cor­po­rate debt to the range of as­sets in its bond-buy­ing pro­gram, pol­icy mak­ers have re­peat­edly em­pha­sised that the cen­tral bank hasn’t run out of room to ease again. That pledge comes against a back­drop of in­creas­ing un­ease in fi­nan­cial mar­kets over the use of neg­a­tive in­ter­est rates and lit­tle sign that too-low in­fla­tion is re­spond­ing to stim­u­lus.

MOST-DE­BATED

Mer­sch said the ECB’s pur­chases of pub­lic sec­tor debt un­der the QE pro­gram, known as PSPP, are one of the “most-de­bated” in­stru­ments and ex­pose the bal­ance sheet of the euro area’s mone­tary sys­tem “to a cer­tain risk.”

“These risks are mit­i­gated be­cause PSPP-el­i­gi­ble bonds need to sat­isfy min­i­mum credit qual­ity re­quire­ments,” Mer­sch said. “By eas­ing the fi­nanc­ing con­di­tions of the pri­vate sec­tor and ex­pand­ing the mone­tary base, the PSPP makes it cheaper for house­holds and firms to bor­row. This can en­cour­age them to bor­row and ex­pand con­sump­tion and in­vest­ment.” The ECB has been fight­ing against what Mer­sch de­fined as “un­prece­dented chal­lenges” with a pol­icy mix that in­cludes neg­a­tive in­ter­est rates and broad se­cu­ri­ties pur­chases. Ad­dress­ing those con­di­tions with an ef­fec­tive re­sponse is some­what akin to driv­ing a car, ac­cord­ing to Mer­sch. “De­pend­ing on road and weather con­di­tions, we use dif­fer­ent tires, we ac­cel­er­ate or use the brakes, and thus strive to al­ways travel at an op­ti­mal speed,” ac­cord­ing to the ECB Ex­ec­u­tive Board mem­ber.

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