14 June 2017

Fed’s cautious normalisation sends the right signal

“The interest rate decision taken by the American central bank sends the right signal. It shows the Fed thinks the US economy continues to be in good shape,” says Michael Kemmer, General Manager of the Association of German Banks. He believes the slightly weaker economic data for the first quarter of 2017 were evidently the result of statistical distortion, which also artificially depressed the figures at the beginning of previous years. The key point is that the US continues to have almost full employment. On top of that, inflation has at least stabilised.

“With this in mind, a cautious return to normal is an appropriate strategy in every respect,” judges Kemmer. “And as far as Europe is concerned,” he continues, “the European Central Bank (ECB) should not leave monetary policy in permanent crisis mode either.”

Last week the ECB made a tentative start on reversing its policy by indicating that rates would not be cut further. A sensible next step down a careful path back to monetary policy normality would now be to introduce a threshold below which banks in the eurozone did not have to pay negative deposit rates on excess liquidity. “A threshold of this kind would allow the ECB to reduce the unwanted side effects of the negative deposit rates,” explains Kemmer. “This step can be taken without delay. It should then be followed in the autumn by a timetable for the ECB’s gradual withdrawal from its bond-buying programme,” he stresses.


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