It’s always interesting when a hawk is willing to talk about the triggers for further monetary easing.
A closed door attitude toward further easing has generally been the bias from the Buba but low inflation and risk of deflation mean that even the hawks are in favour of action should the ECB’s price stability mandate be threatened.
Buba/ECB’s Weidmann, speaking in an interview with MNSI, projects the view that:
1) EUR strength is key to a further lowering of interest rates
2) money markets are not a concern
3) changes to the forward guidance script help broaden the message, and
4) effectiveness, costs & side-effects of QE are being discussed.
On conventional policy we note Weidmann talks up the merits of a negative deposit rate but this is to help counter the impact of further EUR strength on price stability. The focus on EUR-strength, its impact on price stability and thus monetary policy outlook are to be expected and we see this as a soft form of verbal intervention. But these are early days, and the EUR has to strengthen further and on a sustained basis before the outlook for inflation changes.
Weidmann’s focus on an appropriately designed QE program is interesting as this shows a more mature debate as opposed to a complete ruling out of this policy option. His desire for QE to be consistent with the Maastricht Treaty, not to synthetically create a euro bond that redistributes sovereign risk, and buy assets of a certain quality is understandable.
Draghi’s ECB would need the support of Buba/Germany if it were to engage in QE so his views are important.
Overall what we are left with is a picture of the ECB that is not yet ready to act without a further threat to price stability. With the ECB having surprised markets by not easing policy in Feb/Mar it is uncertain how far inflation has to fall and deflation risks rise before the ECB is willing to use remaining easing on conventional policy and then embrace a more active use of its balance sheet via QE.