ECB’s Knot Warns Against Creating Another ‘Central Bank Put’
Europe shouldn’t lean too heavily on monetary policy as the main line of defense against the economic fallout from the virus.
(Bloomberg) -- Europe shouldn’t lean too heavily on monetary policy as the main line of defense against the economic fallout from the virus, Dutch central bank Governor Klaas Knot said.
The European Central Bank policy maker said a strong fiscal response would combat the perception that almost everything hangs on narrower measures -- such as massive ECB bond purchases -- that could have unintended side effects on the economy if left in place for too long.
“Such a perception is risky, as it leads to ratcheting up of debt levels and excessive leverage, as has been observed in segments of the corporate sector,” he said in a speech at a Bloomberg webinar on Friday. He added that this issue had in the past helped create the idea of the “central bank put,” which can lead to financial and markets distortions.
Knot said the Frankfurt-based institution may not even fully use its entire pandemic program as the euro-area economy recovers from the crisis.
He is one of the ECB’s officials with a more traditional take on how far monetary policy should go. At the Governing Council’s last meeting, some had reservations about the size of the latest expansion of the bond-buying program, arguing for a “more cautious approach.”
Bloomberg reported earlier Friday that there’s also a potential rift brewing within the council over the emergency program, known as PEPP. The debate is over how much it should stay weighted toward weaker countries such as Italy, according to multiple conversations with central-bank officials.
Knot said the so-called capital key -- which links bond programs to the relative size of each economy -- should be the ECB’s “compass.”
Italian 10-year bonds rose on Friday, and were up about 3 basis points to 1.246% as of 2:35 p.m. Frankfurt time after earlier falling to the lowest in almost four months.
In his comments on Friday, Knot warned that temporary crisis measures “may lose traction in terms of necessity and effectiveness when the economy moves along a more stable trajectory.”
He also noted that the “E” in PEPP stands for “emergency,” saying it’s important to be explicit about its temporary nature.
Surveys published this week showed that activity in services and manufacturing is picking up again, though measures of demand and employment offer reason for caution about the outlook. Knot added that “ample policy support” will continue to be needed during the recovery.
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