The European Central Bank’s long- term refinancing operations haven’t led to inflationary risks, Governing Council member Klaas Knot said.
“The moment the liquidity would translate into money supply growth and excessive credit growth, then you would get inflationary risks,” Knot said at the presentation of the annual report of the Dutch central bank in Amsterdam today. “We don’t see that at all at the moment.”
“If you look analytically where the inflation in the euro zone is coming from at the moment, there isn’t really core inflation,” he said. “There’s inflation as a result of the prices of goods, especially the oil price is fairly dominant, and there is inflation from administrative prices” such as increases in value-added tax.
The ECB has provided more than 1 trillion euros ($1.3 trillion) in two long-term refinancing operations. Knot said this has provided European banks with time to restructure their balances.
“We can’t repeat these things too often; it can’t be that we’re heading for a situation in which the European banking sector structurally depends on the financing from the ECB,” said Knot, who has led the Dutch central bank since July. “If in three years, when these instruments end, we’re back in the same situation as in November and December of last year, then it will have been an absolute failure.”
The ECB’s long-term loans to banks and its bond-buying program “relieved tensions in the financial markets, but didn’t take them away,” Knot wrote in the annual report. “For a sustainable solution, the problems need to be addressed at the source. Then the unconventional policy can be timely phased out,” he said.
“The solution to the crisis can’t be provided by the ECB in the form of monetary financing of government deficits,” Knot said. While joint euro bonds are desirable in the future, they aren’t suitable as a crisis instrument, he added.
The global economy won’t quickly return to economic-growth levels seen in the years before the current crisis, Knot said. “That’s not realistic, all the more because the increasing ageing of the population lowers potential growth. The cyclical prospects thus aren’t very rosy.”
Knot said it will take several years before euro-zone countries with current-accounts deficits can stand on their own and for the currency union to have a stable financial-economic development.
Central banks should be alert to developments that can lead to instability, even if inflation is under control, the Dutch regulator wrote.
“If periods of stable inflation are accompanied by low interest rates and high credit growth” then “it can be desirable to raise the policy rate while inflation expectations are still well anchored, just to prevent the buildup of financial imbalances and promote long-term price stability,” the bank said.
While the Dutch economy is doing relatively well, the budget deficit and state debt exceed European Union limits, the central bank said. Government guarantees have increased due to the European rescue fund and the home-ownership guarantee fund, the central bank said, repeating its call upon the Cabinet to reform the housing market.
Separately, the Dutch central bank said it didn’t sell any of its gold reserves last year. It held 612 metric tons at the end of 2011 valued at 24 billion euros compared with 20.8 billion euros a year earlier, according to the annual report, which was finalized on March 16.
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