"ECB Treading on Risky Ground"
BÖRSE ONLINE: After a sudden and substantial 0.5 percentage point interest rate hike, the ECB hinted at further large increases. What's the likelihood that Italy, and other heavily indebted EU countries, could face destabilization or a sovereign debt crisis?
Clemens Fuest: With an average maturity of seven years on their outstanding debt, Italians won't feel the full impact of the increased interest rates immediately. However, persistently high inflation will boost tax revenues and lessen the burden of public debt in real terms.
So, while a time bomb may not be ticking with the rising interest rates, the bigger concerns lie in Italy's long-term growth prospects and investor trust in their economic policy. If this trust is lacking, Italy could well face difficulties.
BÖRSE ONLINE: Following the July meeting, the ECB unveiled a crisis bond-buying program to help heavily indebted countries like Italy in times of market turmoil. Dubbed the "Transmission Protection Instrument" (TPI), the program aims to ward off disparities in financing costs among EU countries. You criticize this program. Why do you view it as risky?
Clemens Fuest: Differentials in interest rates are essential for a functioning capital market, acting as a reflection of varying risks. Investors must be incentivized to shoulder these risks. By involving itself in state financing, the ECB risks undermining its independence and setting incorrect incentives for economic and financial policy.
BÖRSE ONLINE: ECB President Christine Lagarde asserts that a country must exhibit a robust and sustainable fiscal policy to qualify for TPI participation. These conditions mirror those implemented during the bond-buying program, OMT, during the euro crisis. What differentiates the current program from OMT?
Clemens Fuest: The conditions for TPI participation are significantly more lenient compared to OMT. Back then, the ECB was bound by decisions made by other institutions, creating potential pressure to support individual member states. In contrast, the current program offers more flexibility, raising concerns about the independence of the ECB.
BÖRSE ONLINE: To what extent do you believe the ECB is now equipped to tackle the current inflation issue through its tools and intricate interest structure?
Clemens Fuest: The ECB's half-percentage point interest rate hike was larger than expected, signaling their determination to normalize monetary policy – exiting bond purchases and negative interest rates. The impact of these moves will materialize over the coming months. It'll be evident whether the ECB is on the right track to manage inflation.
BÖRSE ONLINE: Is the era of negative interest rate policy finally coming to an end?
Clemens Fuest: It's possible that negative interest rates might reappear in situations with low inflation. Presently, though, the negative interest rate policy is over, although it pertains only to nominal interest rates. Real interest rates are still negatively skewed.
BÖRSE ONLINE: Can the sudden increase in inflation rates be considered premature?
Clemens Fuest: While the step was belated, it's better to respond too late than never.
BÖRSE ONLINE: Was the sequence in which the ECB exited bond purchases and abolished negative interest rates the optimal one?
Clemens Fuest: The decision to exit bond purchases was crucial. However, this measure should have been implemented earlier.
BÖRSE ONLINE: With the economy showing signs of slowdown and the specter of a recession, should the ECB tighten its monetary policy with further interest rate cuts?
Clemens Fuest: If the recession results from a decline in supply, it makes little sense for monetary policy to boost demand via rate cuts. Close monitoring is needed to determine if this is the case.
- The ECB's involvement in state financing, such as the Transmission Protection Instrument (TPI), could undermine its independence and set incorrect incentives for economic and financial policy.
- Clemens Fuest criticizes the TPI program due to its significantly more lenient conditions compared to the OMT program during the euro crisis, raising concerns about the independence of the ECB.
- The ECB's determination to normalize monetary policy is evident through their larger-than-expected half-percentage point interest rate hike, signaling the potential end of the negative interest rate policy.
- In response to a question about the premature nature of the sudden increase in inflation rates, Clemens Fuest argues that while the step was belated, it's better to respond too late than never.
