ECB’s journey out of stimulus is still long and unclear
European Central Bank policymakers are preparing to dial back their extraordinary stimulus measures if the economy continues to improve, but that course of action is not yet certain, comments by three ECB rate setters and accounts of the latest meeting showed this week.
Inflation and economic growth in the euro zone have rebounded, but the bloc’s central bankers have yet to be convinced that this recovery would continue if their 2.3 trillion euros ($2.55 trillion) money printing program and ultra-low rates are taken away.
Such caution underpinned the ECB’s decision to keep its policy unchanged at its April meeting and was confirmed by comments by rate setters Benoit Coeure, Jens Weidmann and Vitas Vasiliauskas Thursday.
This suggests policymakers are unlikely to make major changes when they meet again on June 8, opting instead for a small nod to the improved growth outlook.
Still, Coeure, an Executive Board member seen as a close ally of president Mario Draghi, said the ECB should not wait too long to take away its monetary support once it is satisfied that euro zone’s inflation has reached its target of almost 2 percent in a durable way.
“Too much gradualism in monetary policy bears the risk of larger market adjustments when the decision is eventually taken,” Coeure said.
But he may face some resistance on a still overwhelmingly cautious Governing Council, where the governors of the euro zone’s 19 national central banks sit alongside the six members of the Executive Board.
The ECB’s decision-making body was still fretting in April that any hint at a tightening in the monetary stance could upset financial markets and undo some of the central bank’s efforts, a point also publicly made by chief economist Peter Praet.
“After a long period of very accommodative monetary conditions, even small and incremental changes in communication could have strong signaling effects when interpreted as heralding a change in the monetary policy stance,” the ECB said in the minutes of its April 27 policy meeting.
Analysts expect no major change on June 8 beyond a slight tweak in the policy message to reflect an improvement in the economic outlook, as some rate setters advocated doing in April.
Lithuanian governor Vitas Vasiliauskas said the time had also come to begin reviewing the ECB’s guidance, which foresees bond purchases at least until December and interest rates at current or even lower levels until well after that.
“If hard data confirms our improved situation, then the logical step would be to discuss the easing bias,” Vasiliauskas told Reuters.
Central bank sources told Reuters last month the Governing Council was likely to wait until September to discuss whether to continue buying bonds in 2018.
German central bank governor Jens Weidmann and Vasiliauskas said they would be in favor of winding down stimulus if inflation stabilized at the ECB’s target of almost 2 percent.
“If that’s the case then we should think about reducing the monetary stimulus,” Weidmann said in Frankfurt.
Vasiliauskas cautioned bond purchases should be pared back gradually and before any interest rate hike is considered
Coeure struck a different note, however, saying the ECB could even raise rates before bond purchases end if it feels that its negative deposit rate, effectively a tax on banks’ excess cash, was hurting lending.
“It will be about the costs and benefits of having the very low and negative deposit facility rate that we have today,” Coeure said. “It’s not set in stone.”
Source: Reuters (By Francesco Canepa and Balazs Koranyi Editing by Toby Chopra)