Mersch Says ECB Must Put Inflation Before Financial Stability

(Bloomberg) -- European Central Bank policy maker Yves Mersch said the fight to ensure stable inflation must have priority over any financial-stability concerns.

The Executive Board member, speaking in Frankfurt, said European Union law makes clear that price stability is the ECB’s primary mandate. He also said keeping consumer prices in check is more suited to an independent expertise-based body, given that the objective -- inflation just below 2 percent -- is easily quantifiable.

“Financial stability cannot take precedence over price stability,” Mersch said. “If there is a conflict between price stability, which is primarily concerned with the business cycle, and financial stability, which is more concerned with the financial cycle, and some trade-off between the two is required, the Treaties require primacy to be given to price stability.”

The comments come ahead of a meeting between European finance ministers and central bankers in Vienna, where one item on the agenda is a discussion over whether the euro area can cope with higher interest rates. The ECB intends to halt fresh asset purchases this year and has indicated that the first rate hike will be in late 2019.

ECB chief economist Peter Praet acknowledged last month that the central bank must monitor markets because stable consumer prices alone can’t ensure financial stability, and Bundesbank President Jens Weidmann said officials may need to tackle imbalances to prevent them from snowballing into a financial crisis.

But both men pushed back against the idea that the central bank should make financial stability part of its primary mandate, and Mersch took a similar stance.

“Expert bodies with strong guarantees of independence, such as the ECB, might be better suited to ‘contributing’ in an advisory capacity while the ‘ultimate responsibility’ is rather borne by institutions embedded in political accountability arrangements at the national level,” he said. “Otherwise, political pressures to adopt one or the other stance in questions of financial stability might also threaten central-bank independence.”

©2018 Bloomberg L.P.