FRANKFURT (MNI) – While unconventional monetary policy and
liquidity support helped keep the Eurozone’s economy out of depression,
they should not be kept in place for too long, Germany’s Bundesbank
urged Monday.

Central banks worldwide should work to reduce the size of their
balance sheets as markets improve, Germany’s central bank argued in its
March monthly bulletin.

The central bank also reiterated that although central banks will
need to put more weight on financial market developments, giving central
banks a second mandate of financial stability in addition to price
stability would “overload” them.

The Eurosystem’s unconventional measures “contributed considerably
to stabilizing financial markets during the crisis and prevented the
real economy from sliding into a sustained depression,” the bank wrote.

“At the same time the crisis-induced liquidity measures cannot be
extended for the long term,” the famously hawkish bank emphasized. “They
are damaging if they are administered as medication for the long term,”
since continuing to prop up unhealthy banks prevents them from carrying
out necessary restructuring, it argued.

If non-sustainable institutions remain in the financial sector,
they could burden the medium- to longer-term outlook for the economy,
the bank stressed.

Were the ECB to maintain full allotment with refinancing operations
over the long term, it would “impair” its ability to target interest
rates in an “effective” and “efficient” manner, the bank argued.

The Bundesbank explained in a footnote that the concept of
“effectiveness here means the effective targeting of the level of the
short-term money market rates at limited volatility. Efficiency refers
to the requirement of securing money market targeting in line with the
market and with appropriate operational cost.”

While the ECB has engaged in asset purchases in the crisis, other
central banks have made direct asset buys that have bloated their
balance sheets to a greater extent, the Bundesbank observed.

“Here it is also true that as the situation in financial markets
improves, central banks should reduce their expanded balance sheets,” it
argued.

“Continued central bank interventions in the formation of prices on
financial markets are to be viewed critically, particularly since
central banks normally do not have at their disposal a continuous
informational advantage when compared to market participants,” the bank
said.

–Frankfurt bureau, +49-69-720142, frankfurt@marketnews.com

[TOPICS: MT$$$$,M$X$$$,M$$EC$,M$G$$$,MGX$$$,MFX$$$]