European Central Bank Executive Board member Benoit Coeure said Thursday the ECB’s monetary policy and asset-quality review should support positive deleveraging in the Eurozone, which in turn could unleash pent-up monetary easing if confidence is restored.
In prepared remarks to a conference hosted by the Economist in Paris, Coeure said “significant progress” has already been made with bank deleveraging and the ECB’s forward guidance should also help the process by keeping rates low as inflation begins to rise.
“This implies that real interest rates for borrowers will progressively fall as inflation rises. We stand ready to act if this scenario does not materialise,” he said.
But Coeure warned that only “targeted” deleveraging that aims to clean up bank balance sheets will help improve the transmission of monetary policy. Indiscriminate reductions of banks balance sheets, or worse, simply rolling over bad debt, could further impair monetary transmission.
Coeure said he expects the ECB’s asset quality review to “help monetary policy regain traction across the euro area. Actually, this for me will be a measure of the success of the exercise.”
Coeure also said completing banking union remains key to reducing fragmentation in the Eurozone, and urged policymakers who are currently negotiating over the Single Resolution Mechanism and resolution fund – the final components of banking union – to complete the process or risk harming growth.
“Not moving promptly towards the SRM and SRF would prolong uselessly financial fragmentation, leave the euro area financial system exposed to systemic fragility, and, ultimately, be harmful for growth and jobs. This would in particular be the case if the SRF is only slowly mutualised, and if it cannot resort to a common European backstop from the outset,” Coeure said.