Interview with Ardo Hansson, Governor of Eesti Pank

European Central Bank Governing Council member Ardo Hansson comments on the euro-area economy, inflation, interest rates, non-standard measures, minutes and the Estonian economy.
Hansson, who also heads Estonia’s Eesti Pank, made the remarks in an interview in Tallinn on Nov 22.

On inflation:

“If you look at all the longer-term measures of inflationary expectations, you don’t see any evidence of those being disanchored in any way. They have come in very close to exactly where we think they should be, close to but below 2 percent. So that isn’t such a factor.”

“We’ll soon understand more about the exact details of the low inflation number for October, but it seems to be pretty broad-based in the sense that part of it was food prices, part of it energy prices, services prices and so on. The core inflation was also somewhat weaker than had been expected. Of course, we don’t really react to a single number because these numbers can be volatile and because the target is more in the medium term. So it’s not this number per se but more how, in light of that number, we see the medium-term outlook. There I think it looks like inflation will be towards the lower end for some time. We don’t see any kind of rapid rise but at the same time the idea of any kind of outright deflationary risk doesn’t seem very likely either.”

“I think inflation is pretty broad-based, so that makes me feel a bit more that the impact of that change on trajectory going forward is one where you probably see these annual rates rather on the lower side than on the higher side. We’ll get more refined estimates in two weeks. There isn’t anything very visible in the pipeline that would suggest a rapid reversal in the sense of quickly moving back towards higher levels of inflation.”

On the euro-area economy:

“The fact that the third quarter was slower than the second quarter wasn’t so unexpected and the data were pretty much in line with the expectations. There had always been this idea that the first quarter was a bit weaker than the second quarter, so the second quarter reflected a bit of a bounce from an unexpectedly weak first quarter due to winter events and all kinds of other one-off factors. So I don’t think it’s necessarily a problem that the third quarter is a bit slower. Generally we expect this trend to continue, that growth will be weak for quite some time. I don’t think anybody would be expecting a robust or a sudden sharp increase, so this type of sluggish but slightly positive growth is in line with expectations.”

“Looking forward, we see ongoing deleveraging and many countries where the pre-crisis growth levels were a bit too high, so we certainly don’t expect to return to pre-crisis levels. All these factors suggest that a new equilibrium growth rate may be a bit lower than we’re used to in the past.”

“As far as the specifics of 2015, we should just wait for the new projections and see. The baseline scenario based on the September estimates suggests that the global economy on balance would be a bit stronger and the recovery would also be supported by the accommodative monetary policy stance. The fiscal stance is adjusting a bit more slowly now than it did in the recent past. All those factors might support demand a bit but on the other hand I think downside risks are still out there.”

On ECB options:

“The options on rate cuts are still not fully exhausted and there are all kinds of other measures that are still on the table. Of course, every time you use one option you have one less to use. But I don’t see us, by any means, running out of our toolkit of things we can draw on. It depends very much on the particular trends and certain sources and certain instruments.”

On narrowing the rate corridor:

“It’s one of the options on the table. A narrower corridor creates a bit of an anchor for the EONIA rate, because it can simply move in that corridor and that makes it easier to control. But the narrower corridor could also create less prospect for banks using interbank market and so it creates more of an incentive for them to manage their liquidity through their central bank rather than among themselves. The smaller the gap, the more attractive it is to do your liquidity management through the central bank. That’s one of the arguments speaking against a main rate cut without a deposit rate cut. It has been encouraging that the reliance on eurosystem financing has come down, which means that banks are able to act in the interbank market, which would be a healthy trend to continue.”

On a negative deposit rate:

“We are technically ready to do it, it is part of the toolkit. It has positive effects in terms of broadening the room for maneuver. On the other hand, it may certainly compress banks’ net interest margins.”

“We’ve had a tradition of using those 25 basis points so I’d have to look at some analysis of different options. Theoretically, a smaller cut wouldn’t be off the table. Certainly, the bigger the move, the more impact you have. I think what has been on the table has always been the possibility to move into that territory and the technical readiness.”

On long-term refinancing operations:

“Long-term refinancing operations are certainly an instrument that’s been used, so it’s operationally rather straightforward, people know what it’s about and under the circumstances when it was used it had a demonstrably positive impact. You’d want to, for future use, when looking at the concrete case, always think about the effectiveness, whether it would actually deliver the results you want. Right now, you actually see a lot of fairly steady repayment of these existing operations. So you’d certainly want to know if you go down that path that it would actually have some take-up from those for whom it actually matters and not just put it out there and hope. You have to really think this through.”

On excess liquidity:

“The key is that there is a lot of heterogeneity. What makes it more complicated to interpret is that some of the decrease in excess liquidity might be rather healthy because the banks find that they can manage themselves through the interbank market, they feel less of a need to hold precautionary balances, they feel more comfortable about the liquidity situation. That could be a sign of a normalization so to the extent that what’s going on, you’d feel quite positive about it. On the other hand, maybe you’d feel if you lower the buffers then it might increase a bit the pressure on the interbank rates. What I don’t see is a very mechanistic relationship between the excess liquidity number and the EONIA interest rate.”


“The EONIA rate moving closer to the main refinancing rate doesn’t necessarily need to be a reason for concern, it might even be something that you actually welcome. You have to start looking behind it. Some of it, to the extent that it’s healthy as a sign of normalizing conditions, maybe isn’t something that you should resist. But other factors could be less healthy, so you have to look at the greater data and understand what’s driving it. If it’s the strength of European banks that’s driving it, it’s probably a good thing. If it’s sudden worries about the liquidity situation of the banks, then it’s reason for concern.”

On forward guidance:

“It certainly has reduced the levels of volatility and probably also created more confidence about the medium term. If there’s a range of uncertainty about what a central bank can do, I think forward guidance can kind of remove some of the fears of extensive changes. In general, I’m quite happy with that form of forward guidance of the ECB. Some people have said, maybe you want to be more specific, more quantitative, more binding. But I actually think, particularly with the mandate being what it is, with one clear target, to have a more qualitative indication is much more appropriate. If you attempt to overburden the communication with more specificity and then there’s any kind of scenario where it appears in contradiction with you mandate, then it’s a problem. I’m quite comfortable with the formulation and the level of detail it provides.”

On lending to small and medium-sized companies:

“Most of the effort now, the focus is now on the European Commission and the European Investment Bank to start developing the possible instruments. Then you can consider if the ECB has a role. I personally don’t think that we necessarily should be too focused on the ECB having a major role in this area. The primary responsibility lies elsewhere. To the extent there are good securities that emerge out of a process that could be used as collateral that are quite standardized, quite liquid, that’s something that could obviously be considered. But even if you add up all the likely volume of those credits and compare it to overall levels of available collateral it’s not going to amount to a large number.”

On minutes:

“This issue is going to come up quite soon, we will have a structured discussion on this. We will look at these proposals from the Executive Board. Any option will have pros and cons. We’ll look at the experience of some of the other central banks and then come up with a view.”

“The trade-off is that there is demand for more transparency in all countries, a quite legitimate trend. On the other hand, what we need to preserve is the quality of dialog and debate leading up to decisions. If it somehow leads to the fact that the debate gets less open, less interactive, then it could have a negative impact.”

“Publishing minutes in a form that summarizes the debate is a step that I can imagine more easily than if everything gets individualized. Part of it is also, as a collective body we are collectively responsible for this decision. It may create pressure for people to have a more national view and then it would be very negative.”

On Estonia:

“There is a bit of a puzzle in the sense that we have a combination of fairly subdued growth numbers but yet a very robust labor market. In the real economy, there’s one sector that’s doing quite poorly, which is transport, transit trade. If you strip out that particular sector, the rest of the economy seems to be growing maybe a percentage point faster. The sectors that seem to be doing quite well now are wholesale and retail trade, so one of the possible arguments is that more labor-intensive sectors are doing well and capital-intensive sectors are doing less well and that’s how you can explain this.”

“Unemployment is down quite a bit, we believe it’s even below the natural level at about 8 percent, and some of it is structural as well, you have some regions and sectors with excess labor demand that are creating upward wage pressure. Some of that wage pressure is now spilling over into inflation as well. You don’t see it in headline rates, as there have been a lot of one-off factors at play. If you strip those out, you see a clear correlation between services price inflation and wage growth.”

“The economy seems quite balanced still, it’s more that we see the trends that are starting now in terms of wage growth, property prices starting to pick up again. If it were continue now for several quarters, several years, you could get into the situation where some of the imbalances start reappearing.”

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