PARIS: The European Central Bank should be ready in an emergency to buy government bonds to combat prolonged low inflation, a senior ECB policymaker said yesterday, just as the United States is ending such so-called quantitative easing.
Speaking a day after the ECB ordered its staff to start preparing for bolder measures if needed, Governing Council member Christian Noyer said central banks should be prepared to buy public debt if needed to avert deflation or a run on sovereign bonds.
“In extreme circumstances a central bank should mitigate the effects of confidence shocks on sovereign yields by purchasing government bonds,” Noyer told a conference of global central bankers and economists in Paris.
“Such an action may be vindicated if there are risks to macroeconomic or financial stability or even if self-fulfilling runs on public debt may be a threat to market access, or lastly to avoid the deflationary consequences of a public debt event.”
Other speakers warned that the impact of the world’s major central banks taking divergent policy directions after a long phase of easy money could cause turmoil among currencies and increase volatility across the financial markets.
Bank of England Governor Mark Carney spoke of a probable “bumpy transition” between a period when markets have been awash with cheap central bank liquidity and a return to more normal monetary conditions.
“We’re in this, with some exceptions, low volatility, compressed-spread environment, particularly around liquidity premia. That’s going to change as things normalise,” said Carney, who also chairs the global Financial Stability Board.
“But that reality, or that likelihood, shouldn’t, in my view, impact the timing of the start of normalisation.”
The US Federal Reserve Bank ended a multi-year bond-buying programme last week although its policymakers differ about the timing and pace of future interest rate rises.
New York Fed chief William Dudley told the conference the Fed will likely raise US interest rates “sometime next year” and investors seem to be getting the message of patience in this policy-tightening cycle.
Mohamed El Erian, an economic adviser to German insurer Allianz and former co-chief of bond giant Pimco, said central bankers should not underestimate the risk of currency market swings as their monetary policy take divergent paths.
Central banks risked moving from being part of the solution to global economic ills, to part of the problem, and should consider a trade-off between giving short-term economic stimulus and avoiding financial market turmoil, he said.
“As much as these currency moves may contribute to global rebalancing on paper, I would just caution from a market perspective not to underestimate ... the speed and size of currency moves,” he said.
The euro fell to its lowest level since 2012 on Thursday, below $1.24, after ECB President Mario Draghi announced the unanimous determination of the bank’s policy-setting council to take further unconventional measures if necessary to combat falling inflation.
The ECB has begun a new wave of unlimited four-year cheap loans to banks in an effort to revive lending to businesses, and has started buying covered bonds and is set purchase bundled loans known as asset-backed securities.
Draghi effectively committed the bank to boost its balance sheet by about ¤1 trillion ($1.24 trillion) towards the levels it had at the peak of the euro zone crisis in 2012 through those measures, and through others if they fell short.
The euro has lost some 11 percent of its value against the dollar this year without provoking undue alarm from Europe’s trading partners so far.
Central bankers said the issue arose on the sidelines of the annual International Monetary Fund meetings in Washington last month, but other major economies understood that a weaker euro was preferable to seeing deflation in the euro area.
The Bank of Japan decided last week to expand its monetary stimulus policy to try to lift an economy still struggling to emerge from a decade of deflation and economic stagnation.
That triggered a rapid fall in the yen to near a seven-year low against the dollar, raising politicians’ concerns about higher import prices.
BOJ Governor Haruhiko Kuroda, chairing one of the sessions, hinted that the Japanese government should move faster to open up the economy to more competition to boost growth.
Reuters
