Praet's Take on ECB Policy and the Economy: Interview Highlights
(Bloomberg) -- The European Central Bank will need to have a solid monetary policy case before officials act to mitigate the side effects of negative interest rates on banks, according to chief economist Peter Praet. He also sees long-term loans for banks as an important instrument that can be calibrated to counteract possible further deterioration in the economy.
Below are the highlights of a Bloomberg interview with the 70-year old Belgian. As he prepares to leave at the end of May, he also gives an an account of his worst days on the job.
“We are seeing a stabilization of the economy right now, but it’s conditional on the development of a number of geopolitical uncertainties. Here we are seeing some downside risks.”
“We are confident, but up to a point. Our scenario is based on the assumption that political uncertainties, if they don’t disappear fully, will at least be contained.”
Mitigating Side Effects from Negative Rates
“Given the perspective of low rates for longer and the impact on the lending channel, this debate has been renewed, has come to the fore. It is something we have to analyze seriously. For tiering we need to be convinced that it would address a monetary policy question in an efficient way. Work is being done at the staff level.”
“When we look at lending conditions, we don’t see them being impaired or even starting to be impaired, so there is no need to rush.”
New Long-Term Loans
“The pricing of the new round will depend very much on the Governing Council’s assessment of the conditions on the lending markets and on what sort of incentives should be provided to banks. It’s too early to tell, because lending conditions today remain relatively good and we don’t see any impairment in the lending channel.”
“The next assessment of the economy in June will probably be a reasonably good timing to make an announcement on TLTROs. It’s important to stress that you can always revisit conditions and change them while the program is running depending on how lending conditions evolve as we did with TLTRO-1.”
“From the market point of view the degree of confidence in inflation is lower and skewed to the downside. That’s something you cannot ignore as the central bank. All in all, inflation expectations remain anchored, but their dispersion is bigger than before, which has to do with the weakening of the economic outlook.”
“The recent increase of bund prices, where the rates fell to zero or even negative rates, reflects concerns in the market, it’s a flight to safety. They reflect a concern about the economy in general, so it’s an indication of uncertainties in the market.”
“This is a country that can absorb a number of shocks. Of course, on the other side, the German economy depends very much on manufacturing, and as we know, manufacturing has been really hit by the international uncertainties related to protectionism, and also the slowdown in China, and also the U.K.”
“It’s a different case. Italy had a number of recessions before, they had, I would say, three recessions and have a new recession now. It’s a difficult case where you need more structural reforms.”
The Next Crisis
“If the scenario gets worse than what we expect, we must be ready to activate the tools, new tools also. If there is a slowdown of the economy, it would probably manifest itself in a widening of credit spreads, problems of transmission via the lending channel.”
“You have to be alert given the weakening of the economic outlook, the relatively weak profitability of banks. That’s not the base scenario but you have to be ready.”
Mario Draghi’s Successor
“I have nothing to say on this. It was a fantastic cooperation with Mario. But that’s for the politicians to decide.”
Worst Day on the Job?
“I thought about these things now that I’m reaching the end. I had difficult days sometimes in the sovereign debt crisis -- I wouldn’t say a ‘worst’ day. You know, what helps very much in difficult circumstances -- and I must not complain -- it’s basically when you work in a group, in a team, it makes a whole difference.”
“If you really push me to think about the worst day, I must immediately say when there was less unity. You see, these are the situations where the stress goes up because you don’t feel that the team is united. But I don’t see that really as a worst day because the team -- that means the Governing Council -- was very strong, even for those having different opinions, there was a sense of unity in general in the Council, believe it or not.”
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