20 June 2014

Bloomberg News/ Reuters: IMF urges ECB to fight low inflation with asset purchases; and banking union needs strengthening

Bloomberg reported on comments   from senior IMF officials and recent reports on the euro area. “If inflation remains stubbornly low, the ECB should consider a large-scale asset purchase program,” the  IMF said in an assessment of the euro-area economy. “This would boost confidence, improve corporate and household balance sheets and stimulate bank lending.” IMF Managing Director Christine Lagarde said inflation’s resistance to the ECB’s latest measures would represent the “stubbornness” that triggers quantitative easing.

The central bank stopped short of quantitative easing when it announced unprecedented stimulus measures on June 5, cutting interest rates to all-time lows and prodding commercial banks to increase lending. It became the first major central bank to experiment with negative rates, putting the deposit rate at minus 0.10 percent.

“I think there is no disagreement with the IMF. We’ve been clear that in case inflation would be too low for too long, we can use additional instruments, including additional non-conventional measures,” ECB Executive Board member Benoit Coeure told reporters in Luxembourg last Friday. “But we are not in that situation today.” An asset-purchase program “is possible, it is in the toolbox, but it is not needed today,” Coeure said. “I don’t think the IMF would disagree with that.”

Reuters drew attention to other IMF concerns, reporting that the IMF saw the EU as needing a strong system to handle big banks that get into trouble.

While welcoming 'substantial progress' on banking union, the Fund, which helped bankroll the bailouts of several euro zone countries, including Ireland, highlighted its shortcomings.

"Work needs to continue to establish a common backstop to sever effectively sovereign-bank links," IMF officials wrote in their regular review of the euro zone economy. "The current planned backstop may prove insufficient to break decisively bank-sovereign links."

The IMF said that it should be easier for the euro zone's rescue fund, the European Stability Mechanism, to help struggling banks directly, rather than lending money to the banks' home countries.

It also underscored the need to have sufficient funding to handle a large bank that gets into trouble.

IMF report

Bloomberg article

Reuters

© Bloomberg