By David Barwick – BANGKOK (Econostream) – European Central Bank Governing Council member Martin Kocher said Thursday that higher long-term bond yields were tightening financial conditions and therefore had to be taken into account in setting monetary policy, while saying there was no current need to discuss deploying other ECB instruments.

Kocher, governor of the Austrian National Bank, told the Bangkok Economic Festival that it remained unclear whether the increase in long-term yields primarily reflected a higher term premium or changes in underlying economic factors.

“If they have risen, of course, they have tightened the market, and that’s the interlinkage with monetary policy,” he said. “And, of course, optimal monetary policy has to take that into account.”

Kocher said it was too early to determine exactly what was driving the move in longer-term yields and declined to speculate about how persistent it would prove.

Asked whether the tightening at the long end of the yield curve could warrant changes to quantitative tightening or the use of other instruments, Kocher pointed to the range of tools available to the ECB but said conditions did not currently justify discussing their deployment.

“There is a toolbox of the ECB,” he said. “The toolbox allows for quite a lot of instruments, and I think we are not at the stage where we need to discuss any of these instruments. But they are there if they are needed.”

Kocher also said governments and voters had grown accustomed to exceptionally low interest rates and would need time to adjust to what he characterized as a return to more normal borrowing costs.

“Many governments, many public policymakers and also voters have become accustomed to very low interest rates,” he said. “It will take some time, because now we are back to more normal interest rates.”

He said current rates were “nothing unusual when you go back 40 to 50 years,” while acknowledging concern about whether markets could overshoot in the opposite direction and noting that higher borrowing costs increased the importance of fiscal consolidation.

Kocher separately stressed that central bank credibility and independence would become still more important in a world characterized by more frequent shocks, given the more difficult trade-offs monetary policymakers would face.

“If we are in a more shock-prone world, central bank credibility and central bank independence become even more important,” he said.

On climate-related price pressures, Kocher said Austrian analysis suggested droughts had historically had a positive but relatively limited impact on inflation.

“Of course it’s positive, but we’re talking about a couple of tenths of a percentage point,” he said.