Central Banks

Friday, August 10, 2012 - 18:00

ECB's Coene: Inflation Not a Problem, Not Impacting Mon Pol

--ECB Bond Buying Will Not Be 'Automatic', Even With ESM Program

FRANKFURT (MNI) - Eurozone inflation is not a concern for monetary policy now, as there are no signs yet of second-round effects from rising oil prices, European Central Bank Governing Council member Luc Coene said in an interview published Saturday with Belgian daily L'Echo.

"Inflation, which is due uniquely to the rise in petrol prices, is not a problem. It will pass through the economy," Coene told the paper. "What is problematic are second-round inflation effects. But, up until now, in what we have seen in the past, there have not been any second-round effects."

"Thus, the fact that petrol prices are rising presently in the short term, which is anyway surprising since global demand isn't rising, does not immediately have an effect on inflation expectations or on our monetary policy," he said.

Coene stressed that any future ECB bond purchases would not be automatic, even if the ESM rescue fund launches a bond-buying program for a particular country. The ESM remains the "appropriate instrument" for bringing down sovereign yields, he said, while any ECB bond buying would be restricted to the shorter end of the yield curve.

"We created the ESM, which is the appropriate instrument to attack this kind of problem. It is not central bank liquidity that will resolve this problem," Coene said.

"Once the ESM has decided to intervene in longer maturities, the ECB could decide to intervene in shorter maturities to calm the markets. But let us be clear: it will not be automatic. We will maintain our freedom to act."

Coene, who heads the Belgian central bank, said Belgium could yet experience "slightly negative" growth this year. The outlook depends on confidence in the wider Eurozone.

"It's all a question of confidence: in as much as the European Council can restore confidence through the decisions it takes, a relatively quick recovery could take place," Coene said.

For the moment, however Europe's economy has turned sour, he said. "It is clear that something is happening in the world economy, as well as in the European economy, which is clearly evolving in a negative direction."

Coene said that Dexia bank may need to be recapitalized if it cannot raise the capital it needs on its own.

"If market conditions do not allow Dexia to reduce its losses, a recapitalization would certainly be necessary, and relatively quickly," Coene said.

Coene said if market conditions persist that there is a risk this recapitalization would have to take place in the short term, rather than the long term.

-- Frankfurt bureau: +49 69 720 142; email: ccermak@marketnews.com --

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