Bini Smaghi Says Zero Rates, Buying Bonds Problematic (Update1)
By Matthew Brockett
April 28 (Bloomberg) -- European Central Bank Executive Board member
Lorenzo Bini Smaghi s
ignaled a reluctance to cut interest rates too close to zero and said buying government bonds would be problematic for the ECB.
“Bringing the main policy rate too close to zero would risk hampering the functioning of the money markets as it would reduce the incentives for interbank lending,” Bini Smaghi said in a speech on unconventional monetary policy in Geneva today. Government debt purchases, or quantitative easing, would “make sense only when the
interest rate is at zero or very close to zero.”
Bini Smaghi stressed his comments “in no way pre-judge” the ECB’s policy meeting on May 7, when it is due to decide on new tools to stem the euro region’s worst recession since World War II. Still, he expressed a preference for measures already implemented by the ECB aimed at relaxing banks’ collateral and funding constraints “so that they will expand credit supply.”
“The evidence on the extent of these policy measures on market interest rates and money-market conditions is quite encouraging,” Bini Smaghi said, classing current ECB policy as “endogenous credit easing.”
There is “mounting evidence that the eurosystem’s policy measures have been effective in averting a dramatic contraction in credit volumes, though credit developments certainly need close monitoring in the period ahead,” he said.
Divided Council
The
Federal Reserve,
Bank of England and Bank of Japan have already lowered their key policy rates to close to zero and are buying assets to boost their economies. By contrast, the ECB’s benchmark rate is currently at 1.25 percent and policy makers are squabbling over what to do next.
Bundesbank President
Axel Weber has said he doesn’t favor cutting the benchmark rate below 1 percent and is against buying assets, while others such as
Athanasios Orphanides of Cyprus don’t want to rule those options out.
Bini Smaghi devoted much of the speech to highlighting the difficulties for the ECB of buying assets, suggesting he shares Weber’s view. Purchasing government bonds “poses some intricate challenges” due to the euro area’s institutional framework, and buying corporate securities may prove a “difficult endeavor,” he said, noting the “limited depth of corporate bond markets in many countries.”
Asset purchases might also expose the central bank to losses and the consequences of that for its financial and overall independence “should not be downplayed,” Bini Smaghi said.
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