By Steven K. Beckner
JACKSON HOLE, Wyo. (MNI) – European Central Bank President Jean
Claude Trichet suggested Saturday that the ECB needs to keep
unconventional monetary policy weapons in its arsenal at a time of
economic weakness, saying that they need not interfere with its price
stability objective.
Trichet, addressing the Kansas City Federal Reserve Bank’s annual
Jackson Hole symposium, did not say what more the ECB might need to do
in terms of monetary stimulus, but observed that a “large and persistent
downturn” poses a threat to countries’ long-term growth potential.
Trichet’s speech, which will be his last as ECB chief at the
Jackson Hole symposium, was primarily devoted to the need for
“structural reform” in Europe.
Although outsiders often focus on the divergent economic
performances of the 17 nations in the euro area, Trichet contended that
this divergence differs little from that among the 50 members of another
prominent “currency area” — the United States. But he said structural
reforms, e.g. in labor markets, could strengthen the euro-area as a
“single market.”
Trichet’s somewhat nebulous comments about monetary policy, uttered
at a time of considerable unrest in the euro area, with international
reverberations, came in the context of a set of three “priorities” for
pursuing long-term economic growth:
1. “vigorous implementation of structural reforms.”
2. “continued attention to external and internal imbalances.”
3. “greater flexibility on the part of policy institutions.”
It was with regarding to the latter that Trichet touched on
monetary policy, recalling that the ECB responded with “credible
alertness” to episodes of financial turbulence in recent years.
“This includes implementing both non-standard monetary policies and
our interest rate policy,” he said. By “non-standard” monetary policy he
was apparently referring to large-scale asset purchases or “quantitative
easing” — something in which both the ECB and the Fed have engaged.
“Interest rate policy depends on the outlook for price stability,”
he continued. “The use of non-standard measures depends on the
functioning of the monetary policy transmission and must be commensurate
with the level of malfunctioning or disruption of money and financial
markets and segments of markets.”
Though different from conventional interest rate targeting, Trichet
stressed that “our non-standard measures do not in any way impinge upon
our capacity to design our monetary policy stance to deliver price
stability in the medium term.”
The ECB’s main mission has not changed, despite its resort to
“non-standard” policy steps, Trichet said.
“Despite all the ups and down of recent years, our key challenge
remains as it has always been: to create strong, sustainable, balanced,
non-inflationary growth,” he said. “Credibility and the medium-term
orientation in monetary policy allows, where needed, scope and
flexibility to address various types of severe shocks.”
“Over the long-term a commitment to price stability anchors
expectations, improves the workings of the price mechanism, reduces
transaction costs, protects savers and reduces uncertainty,” Trichet
continued. “This is what I meant at the outset when I said that the
theory and practice of monetary policy making paralleled developments in
growth theory — namely, both are now seen to hinge on institutional
quality.”
Earlier in his remarks, Trichet had suggested that monetary policy
has a broader role to play than its traditional one of containing
inflation.
“Some may consider it unusual to solicit views on matters of
long-run growth from the President of a central bank,” he said. “After
all, pick up just about any growth-theory textbook and you’ll find few
references to inflation and fewer still to monetary policy. Monetary
policy is fundamentally viewed as neutral over the long run.”
“And indeed, inflation is ultimately a monetary phenomenon,” he
continued. “Growth, in turn, is ultimately a real one reflecting, in
particular, technology, education and training, capital accumulation,
institutional quality.”
“Nonetheless, monetary-policy institutions can play and have played
a fundamental role in supporting long-run, sustainable growth,” Trichet
went on. “In many ways, I see a parallel between the theory and practise
of monetary-policy making and the shaping of modern growth analysis
which emphasizes the role of sound/proper institutions.”
Those comments came after Trichet said that “the recent financial
crisis has produced a large and persistent downturn in our economies; a
downturn, moreover, that threatens our long-run growth potential.”
Although Trichet did not directly talk about the near-term ECB
policy outlook, his comment about the threat from a “persistent
downturn” could be read as having some significance.
At his last press conference, Trichet had spoken of “upside risks”
to price stability, but more recently ECB Governing Council member Yves
Mersch described the risks as “broadly balanced,” leading to speculation
that the ECB may have to reverse course and cut interest rates again.
Even as Trichet was talking to fellow central bankers in the
shadows of the Grand Tetons Saturday, President Obama was talking on the
telephone to German Chancellor Angela Merkel on the global economic
situation and recent developments in financial markets.
“The two leaders agreed on the importance of concerted action,
including through the G20, to address current economic challenges and to
spur growth and job creation in the global economy,” the White House
said. “They also discussed Middle East peace and agreed to continue
working on a Quartet statement that could provide a basis for the
resumption of direct negotiations between the parties.”
** Market News International **
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