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Markets Are Expecting Too Much From the ECB, Constancio Says

Investors might have outsized expectations about the European Central Bank’s upcoming stimulus decision, according to former Vice President Vitor Constancio.

“I’m not sure central banks will have to do whatever markets think,” Constancio said in an interview with Bloomberg TV. “We’re not in a recession and you don’t need a big package right now. They’re taking some insurance with some measures but no more, and markets are pricing in much more already. That’s what really worries me.”

The ECB holds its next policy meeting on Sept. 12, and President Mario Draghi flagged in July that more monetary stimulus is likely. Investors have priced in a 15 basis-point cut in the deposit rate, currently minus 0.4%, and economists predict asset purchases will be resumed at 30 billion euros ($33 billion) a month for one year.

Draghi Seen Overriding Opposition With QE Push as Gloom Deepens

Constancio, who struck a dovish tone in almost two decades on the ECB’s Governing Council as Portugese central-bank chief and then vice president until last year, warned that negative rates shouldn’t be overused.

“There is certainly a limit if one thinks about the impact on banks and the financial system, which has problems in working well with a policy of negative rates,” he said. “My personal view is we’re already close to the limit.”

That’s why support from other actors is needed, he said, encouraging governments to step up fiscal support if external risks turn the present economic slowdown into a more severe crisis.

There is “no question” that the U.S.-China trade conflict is the biggest threat to growth in the euro area, according to Constancio. At the same time, there’s also a chance of a quick return of confidence.

“If there’s a deal there will be a burst of optimism,” he said. “Animal spirits will change and the whole mood will change with a reflection in financial markets.”
Source: Bloomberg

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