ECB’s Centeno: ECB Policy Has Not Seriously Worsened Financial Vulnerabilities

14 April 2021

By David Barwick – FRANKFURT (Econostream) – Financial risks persist, but the European Central Bank’s policy measures in response to the crisis have not seriously aggravated such vulnerabilities, ECB Governing Council member Mario Centeno said Wednesday .

In an interview with Views - the Eurofi Magazine, Centeno, who heads the Bank of Portugal, said that ‘risks persist and have even been magnified by the crisis; its asymmetric nature. The policy action should proceed, now more targeted, in order to minimize this impact, allowing for an appropriate adaptation and phasing-out of existing measures.’

He dismissed as ‘hard to argue’ the possibility that the ECB’s policy easing had had ‘a material and perilous effect’ in terms of exacerbating financial vulnerabilities.

Although both short- and long-term nominal rates may be historically low, he reasoned, the amount of accommodation they represent is less strong than one might think, as real rates haven’t been correspondingly low in historical terms.

Moreover, he continued, macro- and microprudential policies have taken steps to avert possible vulnerabilities, even if it is still the case that further ‘improvements are welcome’.

‘Third, monetary policy has been carefully designed to avoid undue distortions’, he said, citing the ECB’s tiering system applied to excess reserves. ‘All in all, it is conceivable that adverse side effects will tend to become more manageable, no matter for how long monetary accommodation persists.’

‘A generalized backtracking in monetary policy may be ill-advised’, he added. ‘Assessing the precise frictions that are at work, fine-tuning the monetary policy instruments in view of those frictions or suggesting a relevant role for other policies seems more adequate.’

The likely consequences of not having relaxed monetary policy in the face of the crisis make ‘the potential trade-offs we now face quite limited when compared to the welfare losses incurred in such a scenario’, he said.