WASHINGTON: The European Central Bank will not tie interest-rate policy to specific economic thresholds, a top policymaker said.
“We think it would not be useful,” ECB Vice President Vitor Constancio said on Saturday, referring to the threshold-based approach to monetary policy that the US Federal Reserve abandoned this week after using it for just over a year.
He also dismissed the idea of giving a time frame for when the ECB could raise rates, saying the idea is “even worse” than thresholds.
Earlier this week, Federal Reserve Chair Janet Yellen said the US central bank might raise interest rates “around six months” after it finishes winding down its bond-buying stimulus programme. Stocks and bonds dropped after her remarks on Wednesday.
Constancio spoke to economists and policy makers at a Fed-sponsored conference
on Saturday, just down the
hall from where Yellen made those remarks.
Yellen had also described the raft of economic indicators the Fed would be watching as it geared up for possible rate increases, including measures of inflation and unemployment, and a Fed official on Friday suggested her “six-months” comment was merely meant to reflect market sentiment.
Constancio said the ECB has other tools, including rate cuts, quantitative easing, negative deposit facility rates and targeted liquidity provision operations, if further policy accommodation is needed.
At its March policy meeting, the ECB left interest rates on hold and introduced no other measures to bolster the fragile euro zone recovery, despite forecasting low inflation for years to come.
On Saturday, Constancio said markets mostly missed that the ECB actually strengthened its forward guidance at that meeting, tying its accommodative stance to the closure of slack in the economy.
“It’s something that I think we have to clarify a little better, because I want really everyone to understand that the forward guidance that we have … takes into consideration the ... slack in the economy.”
Meanwhile, the European Central Bank can still cut interest rates further from the current record-low rates, including taking its deposit rate to negative territory, Governing Council member Erkki Liikanen said.
The ECB’s main interest rate is at 0.25 percent and the rate which it pays banks for deposits at the central bank is zero.
“The possibility that we will lower interest rates still exists,” Liikanen said in a TV interview on Finnish national broadcaster Yle.
“If we want to add instruments to monetary policy, the option of charging banks for deposits is one such toll.”
Reuters
