The following is an interview with Christoph Rieger, the co-head of rate strategy at Commerzbank AG. Rieger spoke with Dow Jones Newswires in Frankfurt ahead of the European Central Bank’s policy meeting Thursday. The ECB is widely expected to leave its benchmark interest rate and extraordinary liquidity measures unchanged.
 |
| Christoph Rieger of Commerzbank says many banks still rely on ECB funding. |
The ECB says extraordinary liquidity measures will be withdrawn “gradually.” What is the likely time-frame for the ECB’s exit?
Rieger: Members of the ECB’s governing council, including Axel Weber, have stressed that an exit will not be time-dependent. In other words, it will depend on developments in the economy and, more importantly, financial markets. We’ll need to see convincing signs of a recovery in repurchase and interbank lending before the ECB will end its full-allotment policy, especially for its main weekly refinancing operations. I don’t see this happening any time soon.
What makes you so skeptical? Could you please elaborate?
Rieger: Many financial institutions still rely on ECB funding. Although the number of banks that participate in the ECB’s weekly tenders has fallen significantly, bids still top 50 billion euros, with the ECB honoring all bids. But why pay 1% for secured ECB funds if you can get the unsecured cash elsewhere for just one-third of that price, or around 0.35%? That would be silly, or wouldn’t it? The simple answer is that many houses can’t get the funds in the interbank money market. That’s one reason why the ECB can’t afford to revert to competitive tenders for now. It would risk upsetting fragile financial markets that are already spooked by Greece’s debt woes.
Which banks would be affected most? Could you give names?
Rieger: The ECB doesn’t disclose the names of the banks that participate in its refinancing operations. I don’t want to point fingers either, because it’s a politically charged issue. But I’d like to stress that anybody who claims markets are almost back to normal is simply not reading the figures properly. I personally wouldn’t be surprised if the ECB kept its full-allotment policy for its MROs [main refinancing operations] in place until next year to help struggling institutions.
Some people argue there is a risk to leaving interest rates low and liquidity abundant for too long. It will eventually fan inflation, they say. Do you support this view?
Rieger: I can’t see signs of inflation anywhere across the euro zone, and I don’t know where it should come from over the ECB’s policy horizon. Aggregate demand is the determining factor for inflation. The recent economic pick-up was largely driven by excessive government spending. But this pillar of support will break away next year, at the latest, and I don’t think the private sector will be ready to take up the slack. Unemployment is still rising and some households will only feel the pinch later this year. Further, I don’t expect households to run down their savings to fund consumption. More evidence of a muted inflation outlook comes from the ECB’s survey of professional forecasters: It shows two-year-ahead inflation expectations below the ECB’s objective. Even five-year-ahead expectations are below 2%, so very subdued.
Against this backdrop, when do you expect the ECB to hike interest rates?
Rieger: If everything goes to plan, the ECB could be in a position to reduce its extraordinary accommodation later this year, and we have a first rate hike penciled in for December.