Notes prepared for the 2019 Redburn Economics and Strategy conference

On January 24th I participated to an interesting event organized by Melissa Davies for Redburn. I have prepared the following answers to questions prepared by Melissa as possibly coming in the Q&A session and I thought it useful to share them with my readers.

Redburn Questions January 24th 2019.

Are there any constraints or freedoms that are peculiar to the ECB, compared to the Bank of England or the Fed? Does the ECB have any inherent institutional advantages in this world of transition?
• Drawbacks
• The ECB has no treasuries
• Has a more heterogeneous economy to look after
• Advantages
• Has a clearer, single mandate
• Has a neater implementation framework (not two interest rate floors like the FED)
• Does not have Trump!

How creative can the ECB be with its balance sheet?
• If needed be, very much. It has surprised in the past with inventiveness and could surprise in the future. But it will innovate only if really necessary.
• In order to deal with asset scarcity they could purchase bank loans and/or shares (see my take on:
• They could even intervene on the market for inflation derivatives (see my fancy idea on:

What would stimulus look like in the next downturn?
• As much as possible reducing rates
• If need be moving again to purchases
• Totally new tools (inflation derivatives again?).

How negative can interest rates go?
• Not much further. SNB at -0.75% is probably at the outer limit. Effects on bank profits and intermediation (see Japan) have to be taken into account. Arbitrage with banknotes is not there as yet, but it will come if rates would be brought further into negative.

What is the ECB likely to do in 2019 and 2020?
• Manage exit
• Start thinking about new normal: balance sheet optimal size, floor approach or balanced approach, moving from EONIA to Ester as target rate
• Giving more weight to financial stability
• Investing heavily in macroprudential.

Who is the next ECB Governor likely to be?
• In FT poll I indicated Liikanen as most likely and Coeure as most desirable. But both would be excellent presidents, properly combining flexibility and continuity.

How important is watching the Fed’s experience with QT to the ECB?
• Important but not decisive, seeing if really QT is the symmetric of QE (which I don’t believe it is).

How important is positive central bank equity?
• Quite, it gives assurance about the ability to carry out monetary policy in all circumstances and by all means, as we showed in Bruegel paper ( The ECB is in good conditions from this point of view with steady flow of profits, also thanks to very prudent accounting, with asymmetric capital gains and losses recognition and ensuing provisions.

How has Brexit affected the ECB’s policy thinking?
• I think so far it has had a marginal effect. Of course the ECB is interested in the issue, also because of possible financial repercussions, for example the LCH issue. Missing London as a wholesale financial centre for the € will be a drawback. Possible macroeconomic effects, especially from hard Brexit. But no significant effect so far on policy prospects.