MNI INTERVIEW: ECB To Stick To QT Despite Turmoil - Papadia

The European Central Bank is likely to keep to its balance sheet tightening despite bond market concents prompted by U.S. tariffs, and is unlikely to accelerate policy easing as a result of sliding equities, the ECB’s former director general of market operations Francesco Papadia told MNI.

"I don't think that, as of now, they would see a need to change their attitude, which is that of a gradual reduction of the balance sheet as assets mature," Papadia said on Wednesday. "Anything can happen these days, but I wouldn't regard that as a likely event as of now." (See MNI SOURCES: Tariffs Make ECB More Likely To Cut In April)

The ECB will closely monitor markets, including the equity sell-off, rather than consider any direct action for the moment, he said.

“I think they would look with attention at it [the stock market declines], but they would not change policy for that - even if there were further falls. And equities are falling for a reason, it’s not like this is something unjustified by what is happening.”

Despite fears that quantitative tightening could trigger market volatility when it was first announced by the ECB, this has not been the case so far, he said. Europe may now even become a safe haven for financial markets, he added. (See MNI INTERVIEW: Tariff Shock A Challenge To ECB's QT - Reichlin)

"Trump is doing whatever he can to reduce the appeal of the dollar as an international currency,” said Papadia, who ran market operations at the ECB from 1998 to 2012, though significantly increasing the global reserve role of the euro is still likely "to take years, not quarters."

INCREASED EURO ISSUANCE

Increased issuance of eurozone bonds, particularly German bunds following recent boosts to defence and infrastructure spending, could also heighten the attractions of the euro to international investors, by adding to, together with European Commission issuance, the supply of euro-denominated triple-A debt, he said, even though borrowing is likely to pick up only slowly over coming quarters.

In the U.S., Federal Reserve Chair Jerome Powell has been clear that he "will defend to the extreme" the Fed's core role in maintaining appropriate monetary conditions and financial stability, Papadia said.

"So far the Fed seems to be putting up a focused but determined fight for its independence," he said, though he added that though it has made political concessions on more peripheral topics, such as the digital dollar and green issues.

Europe has "an opportunity to become the leader of sensible policies in the world, promoting multilateralism, free trade and sound macroeconomic policies," said Papadia.

But he warned that any move to confiscate the assets of the Russian central bank could be a serious mistake.
"That would dent the build-up of Europe as a new safe haven,” he said, “The card of frozen Russian assets will have to be played as part of post-conflict negotiations.”