ECB would risk credibility of forward guidance with rate cut: Hansson

By Balazs Koranyi

FRANKFURT (Reuters) - The European Central Bank has no reason to ease policy now and a deposit rate cut, touted at its last meeting as one option, could undermine its forward guidance and hinder its credibility, Governing Council member Ardo Hansson said.

Recent economic data has been surprisingly strong, and in any case, the ECB still has months to decide whether to extend its 1 trillion euro plus asset-purchase program or end it next September, said Hansson, who is also Estonia's central bank governor.

Hansson's comments highlight a split in the ECB's governing council since its unexpectedly dovish message last month, interpreted by some in the market as a de facto commitment to more policy easing in December.

With inflation running around zero, far below its target of almost 2 percent, and risks from an emerging market slowdown increasing, the ECB said after its October policy meeting that it would decide by its Dec. 3 meeting if it needed to ease policy more to boost growth and prices.

ECB Vice President Vitor Constancio said on Thursday that investors may be losing confidence in the ECB's ability to keep prices rising as long-term inflation expectations are showing signs of de-anchoring.

Hansson suggested lowering the deposit rate could also damage credibility.

“If we were to go down the path of a deposit rate cut, it would seriously undermine the concept of forward guidance," Hansson told Reuters in an interview on Thursday.

"Once you engage in a specific forward guidance and don’t follow through, then you erode credibility. It’s an issue we need to discuss," Hansson added.

The ECB had been saying that the deposit rate had hit its lower bound, but then argued that deeper rate cuts by other central banks and a continued decline in real interest rates proved that it also had more room for cuts.

EXPERIMENTS

"The lower bound is somewhere in the negative zone, so it turns out we have a bit more policy space than thought years ago," Hansson said.

"Most of the experiments where rates have gone lower have been in much smaller jurisdictions. None have tried it in such a large jurisdiction and I don't think central bankers like being in this position of experimenting in grey zones. It’s no-one’s preferred option," Hansson added.

Analysts polled by Reuters expect the ECB to cut its deposit rate to -0.3 percent from -0.2 percent next month and to increase monthly asset purchases to 75 billion euros from 60 billion euros.

Hansson said that while the ECB has to make a decision sooner or later about the future of the asset purchase program known as quantitative easing, he saw no urgency. The bank could still spend months contemplating its next move, he said.

"Knowing what I know now, I don’t think the ECB should act (in December)," Hansson said.

"Retail sales have been strong, sentiment indicators are strong, unemployment is coming down, the credit channel is starting to work, the cost of credit to enterprises is coming down and inflation expectations indicated by the survey of professional forecasters suggests that’s not an issue," he said. "There is as much good news as bad news."

While the ECB has said fiscal policy across the euro zone should be calibrated to support growth, Hansson argued that there is very little if any room for more spending.

"Most countries that have the fiscal space shouldn’t use it because they’re already near full employment," he said. "I don’t see too much unused fiscal potential for the euro area. Public debt is already high enough and an obstacle to growth."

(Editing by Hugh Lawson)

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