Trichet Strongly Rejects Weber's Call To End ECB Bond Buying
Published Monday, 18th October 2010 10:27 am - © 2010 MNI News
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PARIS (MNI) - European Central Bank President Jean-Claude Trichet, in a newspaper interview published Sunday, strongly rebutted the suggestion of his Governing Council colleague Axel Weber that the ECB's government bond buying program should be ended.
The Italian daily La Stampa asked Trichet if he agreed with Weber's declaration last week in New York that the ECB's bond purchases (the Securities Market Program) had not worked and should be phased out permanently.
"No! This is not the position of the Governing Council, with an overwhelming majority," Trichet replied, according to an English text of the interview provided by the ECB (which included the exclamation point). "This non-standard measure, like all other such measures, was designed to help restore a more normal functioning of our monetary policy transmission mechanism," he added.
Trichet reiterated that all liquidity injected into the financial system through the bond purchases was being sterilized "euro for euro."
The ECB President also seemed to take exception, although more indirectly, with Weber's assertion that official interests in the Eurozone could be raised before all non-standard liquidity measures have been withdrawn.
"As you know, I never comment on remarks made by fellow members of the Governing Council," Trichet said. "What is important, of course, is that there is only one single currency; there is one Governing Council, only one monetary policy decision, and one President, who is also the [spokesman] of the Governing Council."
He added: "At the last ECB press conference, I said very clearly that current interest rates are appropriate."
Trichet also weighed in again on the situation in currency markets, reiterating the same phrases he has uttered so many times before and which he repeated at his last press conference on October 7.
"I will say that excess volatility and disorderly movements in exchange rates always have adverse implications for economic and financial stability," he told La Stampa. "And I consider it very important that the U.S. authorities also recently confirmed their longstanding position that a strong dollar vis-a-vis the other major floating currencies is in the interests of the United States."
With regard to the emerging economies, Trichet noted that at the Toronto summit they had agreed to make the exchange rates of their currencies more flexible. "It is the case for all of them, including for China, which has confirmed the will to engage in such reforms, as it signalled last June," he noted.
Speaking this weekend at the World Policy Conference in Marrakesh, Morocco, Trichet made similar similar comments exchange rates, calling greater flexibility on the part of emerging market economies "one of the elements for re-establishing global equilibrium."
Trichet's remarks, which have been flanked in recent days by those of other ECB officials, come at a time when the euro is rising sharply against the dollar, and thus against currencies such as the yuan that are still largely tied to the dollar. The euro recently pierced the $1.40 level, its highest in over eight months.
Arguably, one of the biggest factors behind the euro's rise is the fact that the ECB is talking about when to withdraw accommodation at a time when the U.S. Federal Reserve is widely expected to launch a new round of quantitative easing, which would flood the system with dollars and depress the value of the greenback.
Many have argued that such a move by the Fed would be inflationary -- that in fact the Fed actually wants to create more inflation, because the biggest danger in the U.S. right now is deflation.
But in an interview broadcast on the website of the World Policy Conference, Trichet rebuffed this argument, saying he believed the Fed -- and all other major central banks -- largely shared the ECB's view of inflation.
"I am convinced that our colleagues on the other side of the Atlantic have no intention of increasing the volatility of their inflation expectations...their definition of price stability which, I must say, is very close to ours," Trichet said.
He forcefully rejected the argument of those, including IMF chief economist Olivier Blanchard, who have argued that the world's central banks might be well advised to raise their inflation goal to 4%, from the current average level of around 2%.
Such a move, "would have completely disastrous consequences for the anchoring of inflation consequences," Trichet argued. "If we changed our definition of price stability, we would push up expectations, clearly." And that, he said, would lift market interest rates across the yield curve, with negative consequences for the economic recovery -- exactly the opposite of the intended effect.
He suggested that major central banks would never take such a step. "We are totally against it; the international community is totally against it," he said.
In other remarks delivered at the conference in Marrakesh, Trichet said strong steps were needed to ensure that Eurozone member states could no longer flout the EU's fiscal rules, which limit national deficits to 3% of GDP and outstanding debt to 60%.
He lauded recent proposals by the European Commission to increase "economic governance" in this domain, but said they didn't go far enough. And getting the new rules right is "so important for monetary union," he said.
"A number of the Commission's proposals are going in the right direction, but for the euro area more ambitious reforms are needed to ensure the smooth functioning of monetary union," Trichet argued.
He said there needs to be "greater automaticity" in applying sanctions, as well as "accelerated timelines and reduced room for discretion in procedures."
If needed, sanctions against fiscally wayward countries should be imposed earlier in the process, Trichet said. For the EU officials enforcing the rules and meting out the penalties for violators, there must be greater independence, better quality controls for their analysis and stronger powers to ensure accurate economic data from member states, he argued.
He also said, in the La Stampa interview, that he could envision the creation of a permanent crisis mechanism after the European Stability Facility Facility expires in three years, but only as a safety net in case fortified rules don't eliminate the threat of crisis.
"We have said clearly that considerably strengthened fiscal and competitiveness surveillance, as we are calling for, is the appropriate instrument with which to minimise the risk of recurrent fiscal crisis," the ECB chief said. "However, if the risk of debt crisis were to become relevant despite the previous measures, a crisis management framework could be useful," he added. "It would have to rely upon very strong policy conditionality and reinforce incentives for pre-emptive fiscal and macroeconomic adjustment."
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