October 18, 2019 / 3:52 PM / 25 days ago

Reuters interview with ECB policymaker Holzmann

WASHINGTON (Reuters) - The following is the text of a Reuters interview with European Central Bank policymaker Robert Holzmann.

In what ways do you hope and expect Christine Lagarde to change how ECB policy is conducted?

“I hope that she changes the way issues of monetary policy are discussed and decided. I do hope that she encourages different alternative views in order to rethink and refine the current approach. And if we conclude that we need to go in a different direction, then we would do it. This applies for the monetary policy approach but also to what kind of inflation target we should have, whether the current one and the interpretation of symmetry are correct or whether it the target needs to be asymmetric.

Do you think that the policy review Christine Lagarde proposed should revise the target itself?

“The inflationary environment since this target was established has changed. So, 2% in an environment of highly fixed inflation expectations becomes too expensive and difficult to reach, you need too much liquidity to do it. Even if you can reach it, it’s useful to think of a lower target, which could be 1.5 percent, which is my preference. But if somebody said 1.2 percent, I would not say no either.

Should the ECB move back to taking decisions by consensus?

“Consensus has its charm but also sometimes leads a lack of clarity. An alternative way to put monetary policy on the table is how the Fed does it. There is always a vote, the vote is recorded, and after some time, the names with the votes are published. This is one way of creating transparency and accountability. Independence, which is what we expect for ourselves, requires accountability. And what is the best way of accountability? It is that you stick to your vote and how you vote becomes public.

What is the cost of negative interest rates?

“Negative rates endanger the key pillars of European financial market institutions: the banks, insurance companies, the pension fund. Accommodating negative rates requires them to run their business very different or to go out of business. In the long run, negative rates are not sustainable.

Insurance companies and pension funds that must deal with negative interest rates have to move into more risky instruments.

Once pensions funds are impacted, a key tenant of European Commission policy becomes endangered, namely that the unfunded public pension system must be supplemented by a funded pillar. Given the current rates of return, this is not tenable anymore.

So, the pension system needs to be reconsidered.

The ECB claims that the impact of negative rates has been neutral for the financial sector so far. Do you agree?

“The banking system needs tidying up and improvement. But the negative rates don’t make the tidying up easier. Insurance companies and pension funds have no way to neutralize the negative rates and it becomes impossible to provide the rates of return individuals expect.

This is the reason why we have to rethink monetary policy. When the next crisis hits, increasing quantitative easing and making rates even more negative won’t work.

How do you interpret the recent flow of economic data?

“We learned two things yesterday: that a Brexit deal may happen, and an orderly Brexit will improve the mood. The other thing we learned is that the European prospects are brighter than we thought. Our projections have been lowered done but it looks like the readjustment is happening. There are indications that even without special policy measures, improvements are on their way.”

Reporting by Balazs Koranyi

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