Central banks must act

Central banks must act against rising commodity prices, Lux central banker says

Submitted by GATA on Tue, 2011-02-08 16:38. Section: Daily Dispatches

ECB's Mersch: Euro Zone Bailout Fund Needs Government Bond-Buying Powers

By Frances Robinson
Dow Jones Newswires
via The Wall Street Journal
Monday, February 7, 2011

http://online.wsj.com/article/BT-CO-20110207-711115.html

LUXEMBOURG -- The euro zone bailout fund should be able to buy members' government debt directly, European Central Bank governing council member Yves Mersch said Monday.

"In particular, the current European Financial Stability Facility should have the competency to buy sovereign bonds directly," Mersch said. "This is in no way incompatible with the rigorous pursuit of budgetary restraint and structural reforms in every euro zone member, which is indispensable to create the basis of lasting long-term growth."

Mersch, who also is governor of the Luxembourg Central Bank, said the financial crisis "isn't over" and backed proposals by German Chancellor Angela Merkel for a euro zone pact to boost competitivity, adding that proposals by the European Commission and EU Council President Herman van Rompuy to tackle the sovereign debt crisis were "a step in the right direction," but that EU leaders should go further when they meet next month.

"I hope the European Council at the start of March will be more ambitious than these proposals," Mersch said. "It's the first time it's been recognized that growing divergences in competitivity between members of the currency union will lead to repeated crises."

Mersch said the U.S. dollar would continue to be the global reserve currency, though to a lesser extent than previously. He also echoed calls by other European central bankers for China to allow its greater flexibility on foreign exchange.

"There are too many emerging markets and countries which have fixed their currency to the dollar," Mersch said. "If the economies of certain emerging countries could better respect the principle of a floating currency, that would contribute to currency diversification."

Turning to monetary policy, Mersch said the ECB could exit from the measures it has taken to support liquidity in the euro zone, such as buying covered bonds, before or after raising interest rates from a record low of 1%, and that it was ready to do this to preserve price stability.

"Commodity prices are not something we can control ... but we are obliged to rigorously intervene when this translates into an impact on price stability though second-round inflation effects," Mersch said. "However, at this stage inflationary pressures seem to be coming from food prices, which are temporary."

Mersch, who was speaking at the Norbert von Kunitzki Memorial Lecture in Luxembourg, added that banks should take more responsibility for their risk management and be obliged to hold minimum levels of capital.

"Good risk management starts with prudence and common sense, not complicated mathematical models," he said.

Merkel's proposals involved extending European coordination of economic policy to reciprocate for German support of the euro zone members affected by the crisis. Under her plans, some policies that have been decided only at national level so far, such as retirement ages, would be subject to EU-wide cooperation, and reportedly met with opposition from certain EU leaders.

Heads of government will gather in Brussels twice next month to discuss the permanent crisis response mechanism for the single currency.