16 February 2017
Copyright (c) 2017 Dow Jones & Company, Inc.
Governor Philip R. Lane sat down with Todd Buell and Hans Bentzien of The Wall Street Journal for an interview on Feb. 16th at the European Central Bank's headquarters in Frankfurt.
Below are edited excerpts of Mr. Lane's interview with the Journal.
WSJ: The eurozone economy is doing well currently. Why do we need such accommodative monetary policy?
So all of that is built on the accommodative monetary policy. Now of course, the euro area is behind the U.S. in the timing of the recovery. So it isn't too surprising we're growing more quickly because the amount of slack in Europe is bigger.
I mean, monetary policy is--you know, it'd be hard to say it's always kind of the dominant factor, but it's a supporting factor in this recovery.
WSJ: OK, but still we must be reaching a point, right, where QE is probably near the limits, right? What's the right time to start talking about tapering?
When the sovereign bond purchase program was decided in early 2015, the total volume of purchases of all programs was set at 60 billion [euros] a month. Then last March, the assessment was there were quite a few negative indicators in the world economy. And in that context, the decision was made to go from 60 to 80. Now we've decided to go back from 80 to 60.
So it's a normalization of this quantity of purchases. It's quite distinct from the debate that, obviously, at some point will occur, which is that move to tapering.
But the important point is all of the indicators you see are based on, I think, market expectations of this program, you know, being in place. So you can't think too hard about the counterfactuals where we abandon the program. So it's important that the program is, you know, maintained. Currently it's an open-ended program. It's 60 billion a month. There's no declaration of what happens after that.
WSJ: Would you agree that monetary policy becomes more and more accommodative because inflation is rising?
I think the consensus is headline inflation is currently rising because of base effects but that there's not much movement in the core. We know it's predictable that headline inflation is going to come down. So as the base effect washes out, you know, the inflation rate--headline inflation rate is going to fall again.
So what we have to assess is, you know, when you look past those base effects, what's the direction for medium-term inflation prospects? And the assessment is we don't see a signal yet that that's going back to the target. So there's not a reason at the moment to turn off the accommodation.
WSJ: But the March [inflation] forecasts are coming out, and the previous one for 2017, I recall, was 1.3 [percent]. Do you think that the forecast now for this year is going to be higher?
For headline? I don't have a strong view about what might happen to headline inflation, which isn't directly relevant for how we set policy. But I am confident that the monetary mechanism remains effective, that the ECB monetary policy will succeed in returning inflation to target.
What we're seeing is a steady recovery in euro area GDP, a steady recovery in employment; and essentially, as the level of activity goes up, that, you know, standard Phillips curve type mechanisms are kicking in and will kick in. But this is gradual.
It's good to see positive reports. It's satisfying to see that the euro area economy is growing at a steady pace, but it isn't going at a speed where you think there's suddenly going to be a surge of inflation.
WSJ: OK. But just to press the point once more, some have said that summer would be the appropriate time to start talking about tapering, you know, the third quarter. Is that on your calendar?
I think there's a classic split between time-dependence versus data-dependence. I think the time to think about it is when you do have new forecasts that indicate we are materially closer to achieving sustainable-inflation at target. And you know, at the last press conference, Mario Draghi, you know, gave the various criteria by which he would think about that.
So it's--when that time arrives--is the time to talk about it rather than saying the particular calendar point at which you would start to talk about it.
WSJ: OK. Now, on the question of interest rates, there are some people who have suggested that the ECB maybe should get rid of this commitment to have rates at current or lower levels. What's your position on that?
So I think there's a trade-off there. On the one hand, you know, signaling to everyone that the ECB stands ready to act both through lowering rates and indicating we are ready to increase the volume of purchases is a signal that the ECB is flexible and reactive to possible negative market developments. So that is, I think, an important signal to send.
On the other side, you know, I can appreciate the idea that even though the central expectation is we're not going to have to go to lower deposit--negative deposit rates, I am not so sure it's massively important, I mean, if we recognize it isn't very likely that we--given all the good data--have to go more negative, retaining that option just gives a signal that we stand ready to act. I don't see why we would necessarily give that up.
WSJ: The antiestablishment, some would call populist, parties are doing quite well, as you--as we know, in Europe and the world. Do you see any way in which this could potentially influence the setting of monetary policy either through an impact on the economy or through a feeling among council members that if we take a certain course of action, it could inflame or encourage populism?
It's really important to emphasize the independence of central banks, that you know, we would be, I think, in violation of our independence if we tried to become political actors and kind of moderated our actions on the basis of some political hypothesis.
So no, I don't think there would be any scenario in which a consideration of how it might affect some electoral outcomes or some attitudes could be a part of the monetary policy decisions.
WSJ: Is there a risk that when central bankers come out and even give economic analysis, that it may just be inflaming the populace a little bit?
The alternative narrative is if central bankers held their tongue. So if you're asked the question, if you have a kind of analytics if France had its own currency, the historical average interest rate above Germany was such and such. That's essentially a factual statement. Equally, if the analytics of Britain--if trade barriers go up, if there are trade frictions and so on, analytically, here's where we think the steady state level income of the U.K. will arrive. Again, I think that's being politically independent. So it's important because it isn't just opinion and offering an arbitrary opinion, it's transparent. If you're making statements which may have a political impact, it's very important to be able to show the quality of your underlying analysis.
WSJ: OK. Let's talk about another country that arguably is more of a risk of leaving the eurozone--or at least was at one time--Greece. There still seems to be a standoff of some sort there over how to go forward: With the IMF, without the IMF? What do you think is the ideal solution there?
So I think ultimately this is--has to be led by the politicians. And I think from the point of view of central banking, the uncertainty doesn't help. But after that, the choices to be made are political choices.
WSJ: What impact would a worst-case scenario Brexit have on Ireland?
The U.K. is a very important trading partner for us. So, for us, you know, we in the Central Bank would fully recognize that anything that reduces the growth rate in the U.K. is going to be a negative for us--you know, not one-for-one, because, you know, we have other drivers of growth, domestic drivers, other trading partners--but it definitely would be a material negative for the Irish economy, no doubt about that.
That's reinforced in episodes where you have significant depreciation of sterling against the euro. That devaluation effect clearly is a big challenge for Irish producers, even if there are some benefits for Irish consumers because the strong euro against the sterling means lower consumer prices. So there is a balance there, depending on which part of the Irish economy you're talking about.
So, yeah, it's--from a negotiation point of view, from the simple economic effect on Ireland, a deal that limits the scale of trade barriers would be desirable. That's for sure. And then, of course, more broadly, there's a very wide discussion in terms of the political implications of reimposing a border.
WSJ: And Ireland is in a difficult spot now, right? Because not only do you have Brexit to contend with, but President Trump's concern about globalization or wanting to roll it back and encourage U.S. firms to invest at home could potentially hurt Ireland's business model of attracting foreign companies. What's the answer there?
You have to distinguish within the Irish multinational sector between firms which are in Ireland to sell to Europe, Middle East, other non-U. S. destinations where--versus other firms which are in Ireland but where a lot of their customer base is back in the U.S. And that second category of course would be sensitive to any change in the different tax regimes in the U.S.
WSJ: And getting to this point about firms being in Ireland to go to Europe, with Brexit of course there's the whole passporting question and banks shifting around, so--yeah.
Yeah, so that's a special category. So the financial services is definitely--it's a unique category there. But now, I mean, when we think about American firms with service exports out of Ireland, you think more about Google, Amazon, Yahoo, the social network-type companies. But financial services, yes, that's a big open question where there's definitely a reasonable amount of inquiries at the moment of firms--London-based firms who are looking to see where should they go in the EU. There has to be a high level of coordination across EU regulators. The ideal is that firms recognize that there's a level playing field within the EU, and so the locational choices are about availability of skilled workers, availably of office blocks, technology, language issues, and tax issues.
WSJ: Who do you think is going to gain more new jobs? Is it going to be Dublin or Frankfurt?
Well, I mean, if you think about the scale of the size of Ireland versus the scale of Germany, I don't think that's the way to think about it. My bet is there's going to be a lot of fragmentation. So if there were some central planner, a central planner might choose to concentrate a lot of this relocation in a small number of locations. But the reality is firms are competitive, they have different strategies, and it may well be the case that some firms make the decision to put people into Frankfurt. The same firm may put a different unit into Dublin, meaning because essentially it is--you know, London is unique. There's no other London in the EU, whereas other locations in Europe tend to be more specialist in individual niches. So the most likely outcome is--and this is an important, I think, conceptual point is maybe that's OK. If you have an integrated financial system, a common regulatory framework across the EU and through banking and capital marketing and they integrate well, then the fact that there's a physical decentralization doesn't necessarily imply a major efficiency problem. We'll wait and see.
WSJ: And when do you expect to start hearing more public announcements from banks about what they're doing?
There may be announcements of plans, but there's usually going to be a process. You know, so if it's a firm that wants to acquire a banking license, it takes a while to work that one out. It's different for a firm that already exists. So, you know, there might be an international bank which already has a banking unit in some EU country and is essentially announcing a scaling up or a kind of broadening of that activity. That can be announced more quickly than something where there's going to be an evaluation period and so on.
WSJ: What about Northern Ireland and Ireland? Is it thinkable that they merge again? This idea has come up in Germany
That's far outside my mandate or my responsibility as a central banker, but I think it's probably fair to say there might be more speculation elsewhere than there is inside the island of Ireland.
WSJ: OK. So it isn't there yet?
No. But I think the important point there is, again, since 1998 there has been a clear framework. The Good Friday Agreement has kind of outlined the nature of cross-border cooperation. It has outlined the scenarios under which integration could be contemplated, but an important precondition for that is that the population in Northern Ireland would want to do this. And that, you know, I don't think there's any sign of that.
WSJ: On BRRD [Bank Resolution and Recovery Directive] and bail-in, have these increased financial stability and broken this state-bank link? Italy's set up now a EUR20-billion bailout fund. This arguably wasn't really supposed to happen anymore, right?
Europe is holding to the requirements with the BRRD. There are precautionary recapitalizations. So, no, I think definitely it is consequential. The big payoff will be over time. Clearly there are still banks now which are dealing with the fallout from the crisis, and dealing with NPLs and so on. But we're setting up structures where, you know, if banks get into trouble that there are layers of protection. There are bail-in layers before any question of implications for taxpayers.
The combination of BRRD, single supervisory mechanism and so on is really transformative. And we're in this kind of a transition period where with legacy issues and so on, it's more awkward. But when we get to a new steady state and this is how the European systems works, it's demonstrably going to be a lot more stable.
Write to Todd Buell at email@example.com and Hans Bentzien at firstname.lastname@example.org
(END) Dow Jones Newswires
Copyright (c) 2017 Dow Jones & Company, Inc.