Yield targeting an innovative move but legal can of worms for ECB

Wed Sep 21, 2016 5:36am EDT
 
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By Balazs Koranyi

FRANKFURT (Reuters) - Long-term yield targeting, an innovative move now adopted by the Bank of Japan, would solve many of the European Central Bank's own problems but would probably raise even more, making the policy difficult to emulate.

Focusing on keeping the long end of the yield curve stable - around zero percent in Japan's case - would protect bank margins, take pressure off the ECB to buy a preset volume of assets, and reassure markets that there is an effective floor under bonds.

That would make monetary policy more predictable for banks that transmit policy measures to the economy.

This might, on the face of it, seem attractive to the ECB.

With inflation still well short of the bank's 2 percent target, the ECB is under pressure to add even more stimulus to its 1.74 trillion euros worth of asset buys, ultra cheap bank loans and deeply negative rates to boost a struggling economy.

But any further stimulus would push the ECB against one of its many self imposed limits, requiring a number of changes that will likely face varying degree of opposition from the hawks within the Governing Council.

"The BOJ's move is interesting and innovative but the euro zone doesn't have a single sovereign debt market, it has 19, so such a move would be difficult and get the ECB into hot water," Berenberg economist Holger Schmieding said. "What yield would you even target?

"This is far too complex to be worth it and it's a lot of political hassle, raising deep economic questions, yielding dubious benefits," Schmieding added.   Continued...

 
The headquarters of the European Central Bank (ECB) are pictured in Frankfurt, Germany September 8, 2016. REUTERS/Ralph Orlowski/File Photo