Nowotny Signals No Need to Raise Rates in First Half
European Central Bank council member Ewald Nowotny indicated he sees no need to raise interest rates in the first half of 2010 as inflation pressures stay muted.
“Our interest rate decisions are to be seen in connection with our price stability goal and in this context I do not see major threats for price stability in the near future,” Nowotny, 65, said in an interview in Vienna. The comment was in reply to a question whether economists were correct to assume no increases in the first half. There is no “strong need” to shift policy in the absence of inflation pressures, he said.
The Frankfurt-based central bank is starting to withdraw emergency measures designed to fight the financial crisis as the euro-region economy recovers from its worst recession since World War II. While President Jean-Claude Trichet says the ECB has no immediate plan to raise its benchmark rate from the current 1 percent, officials have given themselves room to do so next year if necessary.
The ECB on Dec. 3 tightened the terms of its final tender of 12-month funds to take account of any rate increase next year and Executive Board Member Juergen Stark said five days later that rates that are left too low for too long may fuel more bubbles.
‘Steady Hand’
At the same time, the aftershocks from the recession are keeping a lid on prices. The ECB projects inflation to average 1.3 percent next year and 1.4 percent in 2011, below its 2 percent ceiling.
“If there’s no infringement with regard to these goals then I wouldn’t see strong pressure or a strong need to change the policy that we have, that means a policy of steady hand,” said Nowotny, who joined the ECB in September 2008. He said the ECB never “precommits” to any specific policy.
Nowotny “validates expectations that it’ll take a bit more than six months for the ECB to change its monetary policy stance,” said Laurent Bilke, an economist at Nomura International in London. “I assume the ECB needs to see some further signs of consolidation of economic momentum before they act. We’ve really only seen one quarter of positive GDP growth.”
The ECB is pulling back some of the flagship policies introduced at the depth of the crisis to encourage banks to lend again. In addition to stopping the 12-month tender, it will discontinue its six-month loans after March and only guaranteed unlimited funding in its other refinancing operations until April 13.
Survey
The ECB will probably lend banks 75 billion euros ($122 billion) in the 12-month tender, according to the median of 23 forecasts in a Bloomberg News survey. That compares with a forecast of 150 billion euros in a survey conducted before the ECB announced that the rate would be indexed. The results will be announced at 9:30 a.m. in Frankfurt.
Nowotny, an economist and former chief executive officer of Vienna-based Bawag PSK Bank, said he expects no changes on terms of the three-month operation as “tenders that we didn’t mention will go on for the time being as they are now payday loan.”
When the first year-long operation expires next summer, the ECB “will take all measures necessary to prevent a liquidity shortage” by providing funds with a shorter maturity, he said.
“What the markets see — and I think this message has been taken very well — is that with the decisions that we took in December, the ECB is signaling a cautious policy of exiting,” Nowotny said. “Our intention clearly was not to send a signal on rates.”
Recovery
The economic recovery is giving the ECB room to embark on exit strategies. Europe’s economy resumed expansion in the third quarter as governments stepped up spending and exports rose. A slump in industrial output eased in October and manufacturing expanded for a second month in November.
The pace of the recovery may be restrained by the euro’s 16 percent appreciation against the dollar since mid-February. The current level of the euro “is bearable,” Nowotny said. “But it’s quite obvious that a prolonged and strong revaluation of the euro would have a negative effect on the export performance of the euro area.”
The euro was little changed at $1.4550 today after falling 0.8 percent yesterday.
The ECB this month raised its economic outlook, forecasting growth of 0.8 percent next year and 1.2 percent in 2011 after a 4 percent contraction this year. Nowotny said it’s a ‘positive outlook but a very cautious one,”
Collateral Rules
The central banker also said that the ECB won’t consider the situation of individual euro-region member countries when normalizing its collateral rules. Greek government bonds, which were cut to BBB+ by Fitch Ratings last week, may not be eligible as collateral if the ECB reverts to pre-crisis rules in 2011.
“The policy with regard to collateral is part of monetary policy and it is only monetary policy considerations that are relevant in this case,” Nowotny said. “We’re not looking at particular countries.”
The ECB currently accepts bonds rated BBB- as collateral for loans after relaxing its rules in response to the financial crisis last year. It may revert to the old rules at the end of 2010, under which A- is the minimum required rating.
Soaring government bond-yield spreads in countries with excessive deficits “can serve as a wake-up call,” Nowotny said. Rising deficits are “a matter of substantial concern both for the ECB and the European Union.”