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ECB needs to take rate cuts off the table: Mersch

[February 10, 2017] FRANKFURT (Reuters) - The European Central Bank needs to take rate cuts off the table, tweaking its guidance to preserve credibility, Executive Board member Yves Mersch said on Friday, a hawkish comment that may signal renewed discord among policymakers.

Further rate cuts could have unexpected consequences and in any case, the real economy has been surprisingly strong with inflation rising to the ECB's "comfort zone", so the ECB should adjust its forward guidance without delay, Mersch said at an event near Hamburg.

With inflation rising rapidly, primarily due to higher energy prices, conservative policymakers are increasingly calling on the ECB to start rolling back its super easy policy stance, a shift ECB President Mario Draghi has consistently rejected.

Though considered a hawk in a mostly dovish Governing Council, Mersch may signal a new stage in the debate as adjusting the bank's guidance is widely seen as a low-cost, easy step to reinforce in markets that super easy monetary policy will have to end at some point.

"How much longer can we continue to talk about 'even lower rates' as being a monetary policy option?" Mersch said at an event near Hamburg.

"Considering the importance of credibility for a central bank, as mentioned, there should be no delay in making the necessary gradual adjustments to our communication."

The ECB's long-standing guidance, aimed at assuring markets that policy will stay easy for years to come, has been for rates to remain at present or lower levels for an extended period of time, well past the horizon of its bond purchases.

Still, Mersch refrained from advocating an end to asset buys, a point repeatedly raised by top hawk Germany, arguing that subdued inflation will be persistent and the ECB has to keep its word about asset buys.
Inflation surged to 1.8 percent last month, essentially hitting the ECB's target of just under 2 percent, but will likely ease back on the fading effect of higher oil prices.

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Yves Mersch, Member of the Executive Board of the European Central Bank attends the presentation of the new 10 euro note at the headquarters of the European Central Bank (ECB) in Frankfurt, January 13, 2014. REUTERS/Ralph Orlowski

Mersch added that the risk of political shocks from outside the euro zone had also increased, a potential risk to growth and inflation.

"While the economic outlook for the euro area is steadily brightening, dark clouds are building up on the political horizon beyond the continent," Mersch said.

Mersch also expressed scepticism about a proposal, launched by Irish governor Philip Lane at Europe's financial risk watchdog, to create European Safe Bonds synthetically by pooling and tranching the debt of individual countries.

"It would be difficult to counter the public’s assumption that this would be a surreptitious mutualisation of sovereign debt," Mersch said, echoing the German government's position.

"I therefore don’t see this proposal as being part of the operational agenda but rather as a subject for long-term study."

(Reporting by Balazs Koranyi, Francesco Canepa and Andreas Framke; Editing by Janet Lawrence)

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