ECB’s New Crisis Tool Must Surprise Markets, Bini Smaghi Says
The European Central Bank’s new crisis fighting tool should have an element of surprise to be effective in combating market stress and avoiding a fragmentation of the euro area, former Executive Board member Lorenzo Bini Smaghi said.
Bini Smaghi, who now is chairman of Societe Generale SA, said the use of the Securities Markets Program in 2010 -- when he was still a member of the ECB’s executive -- initially worked because it was big and surprising.
“The ECB has to be able to send messages to the markets that if spreads and fragmentation become a concern, it would be ready to act, but I don’t think we need to give all the details of how you will act,” he said in an interview with Bloomberg Television at an economics conference in Aix-en-Provence, France. “You have to surprise the markets, you cannot be too predictable always.”
Jean-Claude Trichet, who headed the ECB for most of Bini Smaghi’s term, told Bloomberg TV on Friday that the institution has a lot of leeway when the transmission of monetary policy is being hindered by unfounded speculation and that markets are wrong to bet against the euro area.
The comments come as their successors in Frankfurt are working to make good on a pledge made at an emergency meeting in June to create a new anti-fragmentation tool. While they have a provisional title -- the Transmission Protection Mechanism -- there are still differences over tactics and its fundamental design, Bloomberg reported this week.
Bini Smaghi said getting the instrument right is important to ensure the ECB can continue with its plans to raise interest rates without markets reacting in a disorderly fashion. To combat record high inflation, he backs the ECB’s plan to hike by 25 basis points at its July 21 meeting, and said it should then probably accelerate the pace with a 50 basis-point increase in the autumn.
“The ECB has to focus on inflation -- the sooner this happens the more the environment will be appropriate for a recovery,” he said.