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Draghi breaking another taboo?

Times are crucial for Europe. It will either disintegrate or find a new political constitution. Below, something about the efforts of the ECB to prevent disintegration of at least the price level (and probably much more…)

From: Erwan Mahé

I am still working on my paper on QE, following the wonderful reading of 3000 pages of the FED 2010  meetings transcripts, so a very short piece today, because Draghi’s speech this morning looks like it had a ‘secret’ message in it. In fact, just a copy and paste of what I just sent to my customers by …, but this seems important to me.

Link: http://www.ecb.europa.eu/press/key/date/2016/html/sp160204.en.html

After careful reading, I wonder if he is not preparing to modify the country allocation key of the APP…

Full Excerpt for the context (my emphasis):

Expanding the stance

The second, specific challenge we have faced in the euro area has come when we needed to expand our monetary stance – specifically, when we shifted from interest rates as the main instrument of monetary policy to asset purchases via the APP [asset purchases program, M.K.].

In part, large-scale asset purchases aim at reducing the risk-free rate by taking out duration from the market for sovereign bonds. In the euro area, however, we do not have a single risk-free rate since we do not have a single fiscal issuer that acts as a benchmark. And there is no national market which could act as a substitute, not only due to volume constraints, but also because no government security in the euro area is truly risk-free. The prohibition on monetary financing means that every sovereign bond carries a degree of credit risk.

In this context, asset purchases of the size we deemed appropriate must inevitably be implemented in multiple markets. And that means monetary policy operations may unwittingly impact on credit allocation across regions and types of borrowers. That is not unusual – all monetary policy has allocative consequences. Nor does it create a limit on us fulfilling our mandate. But it does require that we aim to mitigate those consequences, under the constraint that we achieve our price stability objective. That can be done in two ways.

The first is by designing our monetary policy instruments in a way that minimises distortions. We did this under the APP by intervening mainly in the most “commoditised” asset classes, i.e. the government bond markets in each country, and by spreading our interventions proportionally across jurisdictions. That effectively constructs a diversified pan-euro area portfolio.

Second, allocative effects can also be reduced by further integrating the markets in which we intervene, in particular government bonds. To that end, a robust fiscal framework which is enforced credibly would reduce the risk inherent in individual government bonds in the euro area, which would in turn make the impact of interventions in different markets more homogenous.

Still, there can be no doubt that if we needed to adopt a more expansionary policy, the risk of side effects would not stand in our way. We always aim to limit the distortions caused by our policy, but what comes first is the price stability objective. That is the implication of the principle of monetary dominance, which is embedded in the Treaty and which lends monetary policy its credibility.

Monetary dominance means that we can – indeed we should – acknowledge and draw attention to all the consequences, intended or unintended, of our monetary policy operations. But it also means that we should never fail to deliver on our mandate solely on account of those consequences. Doing so would be tantamount to redrafting our mandate under the law, something we are not at liberty to do.”

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