FRANKFURT (MNI) – Credibility built up by central banks in normal
times is critical to facilitate monetary policy during times of crisis,
but there is a risk that corrective action could become politically
charged, European Central Bank Governing Council member Athanasios
Orphanides said on Friday.

“The credibility that an independent central bank can establish
with its actions over time…can be invaluable during critical times
when unusual actions may be required that might otherwise risk raising
questions regarding the central bank’s continued commitment to price
stability,” Orphanides – who is head of the Central Bank of Cyprus –
told delegates at an ECB conference in Frankfurt.

The ECB targets an annual inflation rate of just below 2%. During
the financial crisis it has employed a range of unconventional measures
to help shore up the Eurozone economy, including more generous liquidity
provision and, more recently — and controversially — buying government
bonds on the secondary market.

Some market watchers say this extraordinary action has dented the
ECB’s credibility and compromised its reputation for political
independence. Orphanides acknowledged these concerns.

“Independence and credibility cannot be taken for granted…and
must be continuously defended,” he said. “The risk that the corrective
actions taken by a central bank during a crisis become part of a short
sighted political agenda cannot be ruled out.”

The central banker said there is never a need to tolerate higher
inflation or to make a trade-off between price stability and financial
stability.

“Inflation is one of the most virulent and corrosive forces in a
democratic society, eroding the functioning of a market economy,” he
said. “I see absolutely no reason to tolerate corrosive higher inflation
in order to reduce the probability that policy rates may occasionally
have to be very close to zero,” he added.

Orphanides said central bankers were still debating the best way to
deal with asset price booms.

“Interest rates have always been and remain too blunt a tool for
this purpose,” he said. “Regulatory tools should be brought to bear in
order to minimise the risks associated with suspected asset price
misalignment.”

–Brussels: 0032 487 (0) 32 803 665, echarlton@marketnews.com

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