ECB’s Hansson Sees Upside Risks to Euro-Area Economic Growth

European Central Bank Governing Council member Ardo Hansson comments on potential government-bond purchases, deflation, oil prices, exchange rates, Greece, the economic outlook and Estonia.

Hansson, who also heads Estonia’s central bank, made the remarks in an interview in Frankfurt yesterday.

On deflation risk:

“We now see negative headline inflation but if you think about deflation being something very broad-based, across a range of countries, across a range of sectors, something that is starting to affect people’s consumption or investment decisions, then I don’t think we are at that point. One commodity is totally driving the headline figure. The energy component stands out. Headline inflation has come down in line with what might have been expected for an oil price at this level. Core inflation in December was marginally higher than it was a year previous, so core inflation seems to be relatively stable.”

“At this juncture, headline inflation should be looked at but the noise-to- signal ratio in that indicator is very high. We have a much better indication of where we are by looking at core inflation and looking at inflation expectations. That’s tricky to try to evaluate because you have to extract it somehow. One shouldn’t take just one indicator because it’s not exact science to say one particular indicator is the right one.”

“If we were in a range of conventional monetary policy, we would look at these inflation-expectation indicators and say probably we might want to do a little bit more. But now we are in a situation were the options are somewhat more challenging. So we have to think about effectiveness, efficiency, side effects and so on. The world at this stage is not so simple.”

On growth:

“When you look at the forecasts of inflation, nobody expects that suddenly there’s going to be a big up-tick in inflation. We expect growth to pick up, we expect inflation to pick up but by design it will be a slow process. Actually, if you think about the environment for growth, it’s not bad: Competitiveness is improving; interest rates are accommodative; forecasts are for the world economy to be better; capacity utilization is a bit higher; the oil-price shock is positive. Considering all these factors, you’d expect some increase in demand for investment. I would say there is even some upside risk to euro-area growth this year. Of course, there is downside potential to the headline inflation because of the oil price but once growth picks up inflation might pick up again as well. That’s not going to happen very soon but we’re far from a deflationary spiral.”

On oil-price drop:

“For most parts of the euro-area economy the drop in oil prices is wonderful news. The euro area, being a net oil importer, has to see more benefit from it than loss. I can’t imagine a situation where the oil price were to rise and we would cheer it. There is, however, a trade off because the oil-price drop can make the maintenance of inflation expectations a bit trickier. But we should never lose sight of the fact that, on balance, for most issues it is a stimulus package.”

“It puts more purchasing power in people’s pockets and while we see some measures of inflation expectations lower than they were a while ago, at this point I don’t see a deanchoring of inflation expectations.”

On exchange rates:

“Considering the pass-through of oil prices and the fact that it takes a while for them to feed into the rest of the economy, we will be very close to zero inflation unless we see higher oil prices. One factor that might work in the opposite direction is the pass-through of the change in the exchange rate.”

“Given the size of the change, sooner or later a lot of that is probably going to filter into prices as well. If the oil prices changes, you see the effect on inflation immediately but in other sectors it may take a while before changes feed into consumer prices. So the exchange rate creates a bit of upside potential for the inflation rate.”

“The exchange rate is not a target for the ECB of course but the latest drop should support, at some point, a somewhat higher price level. In that sense, it’s certainly a support for price stability. But it’s nothing we target and it’s one of many factors. It’s an indirect channel and a delayed channel. The main factor for the euro depreciation probably is the asynchronous policy cycles in different jurisdictions. If certain jurisdictions are beginning an exit, then we are still at a different phase. That difference certainly is what’s driving the exchange rate.”

On Greece:

“I’d personally find announcing a bond-buying program including Greek government bonds in January problematic. All different options with regard to sovereign-debt purchases have some kind of a benefit but every option also has several downsides. One is possible conflict with the prohibition of monetary financing of governments. This is actually the most important among many of the constraints -- there are many trade-offs but this is one that is given to us by the treaty. You can have trade-offs on economic issues but this is something that’s been put in European law and it has been put there for good reason, because of historical experience. We don’t want to be in a situation where we do things that are beneficial in the short run but more costly in the long run. So when there’s a chance that somebody will come and say I’m going to restructure our debt, committing to buy such bonds is near the borderline of what could be considered.”

On government-bond purchases:

“Buying only AAA government bonds is one option. Everything has it’s benefits. You’d avoid through that option a lot of moral-hazard issues, monetary-financing concerns, but you would certainly lose in effectiveness and also you would have to ask what you are trying to achieve. Whatever you buy, you’d expect to further lower yields. Do we really want to drive these AAA bond-yields further down? So to take and focus all your reserves on bonds that are already very highly priced definitely has its issues. None of all the options comes without problems. Doing nothing at this stage would be rather difficult, doing something is rather difficult, so in the end it’s a very complicated assessment of the benefits and costs.”

“Having national central banks buy government bonds is something that deserves to be considered too. It has obvious benefits in terms of avoiding risks of mutualization of debts but would also reduce the unity of monetary policy. The default option for most of our monetary policy has been risk sharing, non-risk sharing tends to be the exception.”

“If there had been a political decision to issue more European-level bonds and you would have agreed that this is a good idea, then we could more easily behave like other central banks and buy bonds. But we have a quite different situation where the vast bulk of debt is issued at the national rather than European level. The question is whether it is appropriate to create a similar situation through a different channel. I’m worried that this is going into a territory where we have to say that we’re in a different position from most other central banks.”

“We shouldn’t just wish it away and say we wish we were in a different world. The structure in Europe just isn’t one where the ECB can easily buy government debt.”

On corporate-bond purchases:

“We should be looking at the universe of corporate bonds. If you think what we are trying to achieve -- getting inflation on a slightly higher path than it is right now -- we can achieve that by increasing demand. Demand can come from the government or from the private sector. I don’t think that with a public debt ratio of 90 percent we should be encouraging governments to further expand deficits. So what we’re left with, what we should focus on, is the private sector. So I would rather take a more surgical approach and say our aim is to get the private sector to spend more so let’s use a private sector instrument. The downside of course is when you look at the universe of such bonds, there are fewer of them, they are operationally more difficult to buy. Also the volume you could achieve is lower but I think the quality you’d achieve is much better as you don’t have the concerns of monetary-financing of governments, there are fewer financial-stability concerns, you are not taking the pressure of governments to reform. So you have maybe less quantitative impact but a better quality, it’s more targeted to what you want to achieve.”

“Of course you don’t want to get in a situation where you seem to support certain companies and we would have to be cautious about what we’d buy but the universe of corporate bonds is certainly an option to consider.

On agency-debt purchases:

‘‘Buying agency debt could be less problematic than buying government debt. It gets you around a lot of the issues with regard to government financing and mutualization. Europe as a whole has decided to issue them so that level of mutualization is already agreed and we’d just be operating in that universe. One of the downsides might be that the volume you can achieve is lower.”

On latest stimulus measures:

“You can argue that there is some transmission from these instruments. The banks are offering now lower interest rates to the private sector than we saw a few months ago. The question is how much patience do you have to see the effects of these measures. If you expect these channels to work overnight, it’s not going to happen. You shouldn’t become overactive every few months when you don’t see the full effects yet.”

On balance-sheet intention:

“For me, the composition and the details are just as important as the volumes. To focus only on one issue and forget about the others is problematic. You can have high volumes which don’t achieve much and you can have lower volumes which achieve quite a lot. I think quality is just as important as the quantity. You can always change the language but the more important issue is whether you want to go in the direction to focus on that one number or not.”

On Estonia:

“Wage-increases seem to have moderated a bit. We were seeing wage growth in the 7 to 8 percent range, now we’re seeing it in the 5 to 6 percent range. We now have a bit more economic growth as well than we thought we had 6 months ago. So the gap between productivity growth and wage growth is better than it was six months ago.”

“We had two main imbalances, the wage growth and the growth in property prices. The growth in property prices has also moderated, so our imbalances are in better shape than they were half a year ago. Generally, the economic situation isn’t bad given the external environment. We now see growth of about 2 percent for last year, 2 percent this year. It’s not what we were used to but if you think about our near neighborhood, we used to benefit from our neighbors doing very well economically. Now Finland hasn’t been doing very well and Russia obviously isn’t doing well. In that context, Estonia’s performance isn’t bad.”

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