Interview with Ardo Hansson, Governor of Eesti Pank
Interview with Süddeutsche Zeitung
Ardo Hansson, Governor of Eesti Pank
Conducted by Markus Zydra on 18 December
Published on 20 and 23 December 2014
SZ: Mr. Hansson, the ECB council has been discussing whether to buy stocks, bonds and every other asset but gold. Is that a sign of despair?
Hansson: It makes sense to have a full picture and start off by giving all these options a chance. That is a more honest way rather than taking some possible measures off the table from the beginning. We have reached the zero lower bound in interest rates. Nothing else can be done there, so it is a natural discussion
SZ: Do you have a problem with the low inflation rate in the Eurozone, currently at 0.3 %?
Hansson: I think you shouldn’t react to one particular number, but of course we have a mandate that requires us to keep inflation in the medium term at around two percent. In that sense we are technocrats and have to react to it.
SZ: You are worried?
Hansson: If it does turn into a deanchoring of inflation expectations, then yes, but measuring such a deanchoring, meaning where people expect inflation to be lower than two percent in the medium term, that measuring is a difficult exercise where at the end a judgment call is involved as well.
SZ: You do not like the idea of the ECB buying government bonds?
Hansson: I am skeptical and I am looking for some answers on the likely effectiveness of this measure. If the ECB buys government bonds of the Eurozone, the yields on the bonds will get even lower, but they are already at record lows. The governments could then borrow more money than before since the cost of interest would be lower. Then you get to ask the question whether the ECB is or is not doing monetary state financing, which is prohibited.
SZ: There is the suggestion among ECB Council members that national central banks could buy their own bonds, e.g. the Banca d‘Italia could buy Italian government bonds. That would keep the risk off the ECB balance sheet so the Italian tax payer would be at risk, not the European tax payer.
Hansson: Yes. That is an issue, how you want to share the risk and how much the risks should be held by each country. There is always a potential concern that the ECB is engaging in monetary financing by buying certain government bonds. We all know that there are political parties in the Eurozone who promise to restructure their government debt once in power. So the ECB knows about this risk of losing money, we can read it in the paper every day. Knowing that – should the ECB really buy these bonds? This is already a very borderline call. So some central bankers say if there is this big risk of credit loss we should not share the challenge.
SZ: Despite that, there is a majority on the ECB council in favour of doing it. Why?
Hansson: The government bond market is the biggest market, so if you want to buy a lot, then it is the market to go to. People always have different intellectual paradigms and different schools of thought, so it is natural that there are different views. The same happens at the central banks in the US, Japan and the UK.
SZ: Is the volume Draghi promised to put into the Eurozone enough?
Hansson: I am not sure if targeting the volume ex ante is the way to do it. You should rather say you want to get to a specific inflation rate within a period of time and let the market decide how much you have to buy.
SZ: What could a compromise in the ECB Council look like?
Hansson: I don’t know, but I want answers as to the point of QE at which we start coming into conflict with monetary financing. Every option the ECB has got has weaknesses. Doing nothing also has its weakness. So it is a difficult situation we are in trying to balance everything for a good decision.
SZ: Do you expect a decision on QE to be taken at the next meeting on 22nd of January?
Hansson: We need to wait for incoming data. The geopolitical situation and the drop in the oil price have created so much volatility, which makes it harder to interpret the situation for the medium term.