Gouverneur Nowotny – Interview mit Market News

28. Oktober 2013, Wien

ECB Nowotny: 'No Realistic Prospect' Of Refi Or Depo Rate Cut

VIENNA , (MNI) -  European Central Bank Governing Council member Ewald Nowotny said that while the ECB's forward guidance remains valid, under the circumstances it is unlikely that the ECB will cut further either the main refinancing rate or the deposit facility. 

Still, Nowotny, who heads the Austrian National Bank, stressed the need for monetary policy in the euro area to remain accommodative.

     There is a large consensus on the Council with respect to the need to avoid a liquidity cliff, he said, urging the use of medium-term instruments for the purpose and saying it would make sense for the ECB already to provide markets with a corresponding expectation.

     Policymakers and other "have to live with" the strong euro, given the lack of realistic options at the ECB's disposal to do anything about it, he said.

     Risks to the economic outlook are now balanced as the recovery has entered a phase where, while still relatively weak, it is at least self-sustainable, he said.

     "I do not think that having a negative deposit rate is a realistic perspective, but I also do not see a realistic perspective of lowering the main policy rate," he said. "For one thing, we have clear signs that the recovery is getting stronger. For another, the economic prospects in Europe of the strong countries and the weak countries are still very divergent, which would mean that the optimal interest rate also would differ, but what we have now is a state of affairs with respect to the policy rate that is at least acceptable for all European countries."

     Moreover, he argued, "a reduction of the interest rate would not help too much" peripheral Eurozone countries make necessary adjustments. "The possibilities for monetary policy are very limited, especially with regard to interest rates. Where there is room for discussion is with regard to liquidity provision. There I see room for maneuver. But not with interest rates."

     Whether the ECB would actually implement another three-year LTRO "is something that we still have to discuss," he said, "but where there is a big consensus is with respect to the need to avoid a liquidity cliff when the LTROs expire."

     There are "other instruments available to provide liquidity" and ward off such cliff effects, he noted. In any case, given that volume and maturity both matter, "it makes sense to have some medium-term instruments available. And it would make sense also to give adequate signals to the markets."

     Nowotny countered the argument that many banks are actually repaying LTRO money ahead of time by observing that this was not a homogeneous development and that it was "important to have stabilization of the Eurozone as a whole."

     Turning to the outlook for price stability, Nowotny categorically excluded any deflationary prospects. Although currently low Eurozone HICP is "a concern," he allowed, expectations remain solidly anchored in line with the ECB's medium-term objective.

     Concerning "potentially deflationary effects" he said, " I have to say that up to now, we are still at levels of the dollar-euro-exchange rate we have been at before, so this is not something extraordinary and I would not see a reason for an immediate reaction."

     He continued: "Of course we do not welcome the appreciation, and I'm also aware that the strengthening of the euro has an especially negative impact on the weaker economies and might therefore increase the economic divergence. But I do not see any instruments we could use against it, and I also don't see that the problem has reached a dimension requiring a response. So we have to live with it."

     The economic recovery is now self-sustaining, Nowotny said, but even if the euro area expands by 1.0% next year, this is "clearly below potential output."

     "For the Eurozone the prospects for growth are balanced and improving," he said. "But one always has to see that we are starting from a low level, and that means we are still below potential growth. So we still have to have a monetary policy that is supporting the upswing."

     Nurturing the recovery also means that national governments must continue to implement structural reforms necessary to improve the longer-term outlook, he said, even as Europe must also avoid unduly stifling short-term impulses.

     Therefore, he said, "a certain flexibility as has been shown by the EU Commission with regard to the fiscal outlook makes sense in this very sensitive situation. We see a chance for an upswing in Europe and we should take this chance, and not counteract it."

     As to the ECB, he reiterated, "we are clearly in an accommodative stance and there are good reasons to keep it this way, at least for a certain period of time."

     Such accommodation is warranted "as long as we are clearly below potential output, and as long as there is no perspective of inflation," he said, pointing again to the importance of inflation expectations.

     Asked about the state of private lending in the context of the set-up of Europe's Banking Union, Nowotny said, "We cannot deny that the next months will be months of a certain nervousness, because this is of course a unique operation that we are starting in Europe."

     The conclusion of the operation around mid-2014 should bring "a clear improvement in the economic perspectives for the banks, and that should translate into a greater propensity to lend," he said. "But for the time being I think one has to admit that there is a general mood of caution."

     Nowotny flatly rejected the idea of another haircut on Greek debt: "Most of the Greece's creditors are public entities, and it will be very difficult - and in the case of the ECB impossible - to accept haircuts."

     One therefore has to "think about other ways" to ensure debt sustainability in Athens, he said, but this is mainly up to the Greeks. Progress has been "quite substantial," he added, "but it may take longer than we expected."