February 21, 2018 / 10:53 AM / 4 months ago

Euro, yield rise not unwarranted tightening: ECB's Vasiliauskas

FRANKFURT (Reuters) - A rise in euro zone bond yields and the value of the euro currency is a natural reaction to the bloc’s strong economic performance and not an unwarranted market tightening, European Central Bank policymaker Vitas Vasiliauskas said.

Lithuania's central bank governor Vitas Vasiliauskas speaks during the Euro Conference in Vilnius September 25, 2014. REUTERS/Ints Kalnins/Files

Risks to growth are tilted to the upside so it was appropriate for the ECB to reword its policy guidance to cut the emphasis on bond purchases and broaden out the focus to its full range of instruments, Vasiliauskas, Lithuania’s central bank chief, told Reuters in an interview.

The comments suggest that Vasiliauskas does not see rising yields and a stronger euro as obstacles to a further withdrawal of stimulus, even though policymakers have flagged the exchange rate as a key source of risk.

“With regard to the exchange rate, it is quite a normal reaction,... it’s the outcome of the strong euro zone economy,” Vasiliauskas said. “The economy is improving and markets expect higher inflation in the medium term.

“I have personally not seen any unwarranted tightening (of financial conditions.)”

Markets expect the ECB to shut its 2.55 trillion euro ($3.14 trillion) bond purchase scheme by the end of this year but ECB President Mario Draghi has warned that any “unwarranted” tightening of financial conditions could prompt the bank to rethink policy.

Launched three years ago, the ECB’s quantitative easing has resurrected growth and inflation. But the scheme has run its course and a growing number of policymakers have said it may be time to end asset purchases since growth is now self-sustaining.

In the next step towards the exit, the ECB could rework its so-called forward guidance, which stipulates that purchases will continue until there is a sustained rebound in inflation.

But as the potency of fresh buys declines, some have argued that the ECB should stipulate it will use all policy instruments and not just the bond buys to keep raising inflation.

When asked if he would support such a change in the guidance, Vasiliauskas said: “Of course, of course.”

“I was always a big fan of making full use of all instruments and not concentrate on one part of non-standard monetary policy measures, such as the asset purchase programme,” he added.

The ECB said discussions on changing the guidance could start in “early” 2018 but policymakers have said this has not yet happened.

Once the ECB is ready to end purchases, now running at 30 billion euros a month, they should be wound down gradually instead of in a single step to avoid the risk of the bank having to backtrack, Vasiliauskas said.

“Nobody expects a scenario with a sudden end to the programme. Especially having in mind the experience of other central banks. You don’t want to take steps forward then back, so we should be careful in making (a) decision,” he added.

Ahead of fresh economic projections by ECB staff on March 8, Vasiliauskas said growth and inflation remained broadly on the same path outlined in the December forecast.

Asked about the banking troubles of Latvia and the risk of contagion to neighbouring Lithuania, Vasiliauskas said he was relaxed given the low level of foreign deposits in Lithuanian banks.

Latvia’s third-biggest lender has been accused by U.S. authorities of money laundering and helping breach sanctions on North Korea, while the central bank chief has been suspended while allegations he solicited a bribe are investigated.

Bank of Latvia Governor Ilmars Rimsevics is also a member of the ECB’s rate-setting Governing Council.

“Given the low level of non-resident deposits in Lithuania, I’m quite relaxed regarding non-residents, and regarding money laundering,” he said. “Most of our banking sector is domestic-oriented.”

($1 = 0.8114 euros)

Reporting by Balazs Koranyi; Editing by Catherine Evans

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