Bank of Lithuania
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Interview with Chairman of the Board of the Bank of Lithuania Vitas Vasiliauskas conducted by Tom Fairless. Interview published on June 25, 2018 on Wall Street Journal.

How confident are you in the eurozone economy and the ECB’s decisions last week to phase out QE?

We make decisions always based on macroeconomic figures and forecasts in the medium term. We are quite confident. We are facing continuous growth in the euro area. In a medium term perspective we believe that growth will continue and growth is also above potential and it will continue above in the medium term. So from the economic point of view we are quite optimistic. But I fully agree that we should take into account all risks and that is one of the reasons we are saying that risks currently are balanced but when we are talking about the future, there is a possibility to face downward risks.

You’ve said QE will end this year. What would it take to change that?

The economic situation is good. I do not see any need for continuing QE. Of course we said we will end the program step by step, that means we will continue the current amount of purchases until the end of September, then we will have a transitional period with 15 billion per month, then we will stop. I think it’s very gradual behavior and very cautious behavior with a possibility to rethink if needed.

How much of a concern is escalation in trade conflict?

I think it is one of the main international factors which can influence the global economy in the short and medium term perspective. And of course, by thinking on our further steps we should take into account that risk. This is one of the risks which can make the current balance of risks negative.

If that were to happen, would the main tool be interest rates or QE?

We have shown in the past that we are creative people. We have a lot of tools which we can use.

Core inflation has stayed in quite a narrow band despite the ECB’s stimulus. Is that concerning?

No I don’t have any concerns, I think in a medium term perspective we can expect some upward movement of core inflation. That is one of the reasons why we are saying that we are driving in the direction of our aim of 2%. Of course it is related with the labor market and with wages increasing in some member states, especially big member states.

If you did want to extend QE how much room would there be to do that under the current rules?

I think we are focusing too much only on the asset-purchase program. We should speak about all kind of tools. For example TLTRO was a very successful instrument. Of course the QE has limits but as we said in Riga, reinvestment is also a very important factor of the program. We also have additional tools that were used and can be used in future if needed. But at the current stage it is premature to speculate.

Do you have any sense of when or how interest rates might start to increase next year?

 As we said, nothing through summer. In this part of the world, summer means until the end of September. I would not like to speculate. I think from the current perspective, maybe we can think about the possibility to discuss further steps in autumn but as I said, discuss.

So in autumn next year you’d start to discuss interest rates?

Yes, yes. But everything depends on circumstances and on the environment.

There’s a new divergence between the ECB and Fed that is weighing on the euro. Is that positive for the ECB?

It’s because the environment is a little bit different. As far as I understand the U.S. is in a fiscal stimulus regime, in Europe we have a little bit different situation so of course the policies are diverging.

How concerned are you about the side-effects of all these stimulus measures that have been running for almost a decade?

We as central bankers are always concerned. But at the same time monetary policy is one thing, those side-effects can be managed by other kinds of policies, for example macro-prudential policy. Prudential policy, especially for example when we are talking about the banking sector, NPLs, should be solved in country-specific situation. Not only the ECB is a game in town, other policies should also use their mandate. Now we have a very good window for deepening some pan-European reforms, for example we have to finish banking union as quickly as possible. We have to make significant progress in capital markets union. And regarding domestic issues, each country has to do its homework and make country-specific reforms.

What if there’s a recession in the eurozone in the next two years?

From the current perspective, the medium-term horizon is quite optimistic. If something can happen, we will react to it. The history of the ECB, especially the later history, showed we reacted actively to the risks. But the ECB cannot be alone. Others need to fulfill their own mandates.