ECB’s Mersch warns of returns’ dip in Central Bank Action

BLOOMBERG

Central banks’ extraordinary measures to spur growth may eventually show diminishing
returns while a key part of the
European Central Bank’s quantitative easing programme carries a “certain risk” that has been mitigated, ECB Executive Board member Yves Mersch said.
Mersch, in a speech to the Ambrosetti Workshop in Cernobbio Italy, on Saturday, reviewed the various policy instruments that the ECB and other central banks have used to aid economic recovery.
“When weighting the ‘benefit,’ though, one may consider that as the usage of these instruments is expanded to very high proportions, they may start to display diminishing returns at some point,” Mersch said in the speech.
Since the ECB last month cut rates to record lows and added corporate debt to the range of assets in its bond-buying program, policy makers have repeatedly emphasized that the central bank hasn’t run out of room to ease again. That pledge comes against a backdrop of increasing unease in financial markets over the use of negative interest rates and little sign that too-low inflation is responding to stimulus.
Mersch said the ECB’s purchases of public sector debt under the QE programme, known as PSPP, are one of the “most-debated” instruments and expose the balance sheet of the euro area’s monetary system “to a certain risk.”
“These risks are mitigated because PSPP-eligible bonds need to satisfy minimum credit quality requirements,” Mersch said. “By easing the financing conditions of the private sector and expanding the monetary base, the PSPP makes it cheaper for households and firms to borrow. This can
encourage them to borrow
and expand consumption and
investment.”
The ECB has been fighting against what Mersch defined as “unprecedented challenges” with a policy mix that includes negative interest rates and broad securities purchases. Addressing those conditions with an effective response is somewhat akin to driving a car, according to Mersch.

“Depending on road and weather conditions, we use different tires, we accelerate or use the brakes, and thus strive to always travel at an optimal speed,” according to the ECB Executive Board member.

sweeping political and economic changes in recent years that have seen most Western sanctions lifted, opening up the country to new streams of international
investment.
Both the outgoing military backed government and Aung San Suu Kyi’s incoming National League for Democracy have vowed to increase capital flows to local businesses and to spur investment.
The World Bank has said firms cite access to finance as the main obstacle to doing business in Myanmar.