ECB officials outline policy vision

We will monitor closely any impact forex rate movements might have on our primary target of price stability, says Weidmann


FRANKFURTEuropean Central Bank (ECB) officials toned down the alarm over recent market volatility while outlining their visions for a gradual end of ultra-accommodative monetary policy.

“If the expansion progresses as currently expected, substantial net purchases beyond the announced amount do not seem to be required,” Bundesbank president Jens Weidmann said yesterday in a speech in Frankfurt.

His colleague Peter Praet — the ECB’s chief economist — cautioned against too much activism, saying policy normalisation will be a “long, complex” process. Both officials signalled that the latest fluctuations observed in financial markets are not yet reason for concern.

“We will monitor closely any impact foreign-exchange rate movements might have on our primary target of price stability” and should not “allow ourselves to become unsettled by the decline in equity prices we have just witnessed”, Weidmann said.

With robust and broadbased economic growth slowly rekindling price pressures in the 19-nation euro-area, the ECB’s Governing Council is getting closer to scaling back stimulus. President Mario Draghi told lawmakers this week that policy will evolve in a data-dependent and timeconsistent manner, claiming it is too soon yet to claim victory in inflation.

Asset purchases are currently scheduled to run at a monthly pace of €30 billion (RM144 billion) through September, and the ECB has pledged to keep interest rates at their current record-low levels until “well past” the end of bond-buying.

As the central bank gets closer to ending asset purchases, “you have to be more specific about what do you mean by ‘well past’ on interest rates,” Praet said during a panel discussion in Frankfurt.

Earlier in the morning yesterday, he said in a Twitter question-and-answer session that forward guidance on interest rates “will naturally increase in importance”.

Investors are listening to policymakers’ every word for clues on how stimulus will be adjusted. After an account of the Governing Council’s

December meeting showed officials were considering having a debate about a gradual change in their so-called forward guidance early this year, the euro soared and bonds slid.

Draghi said in his Jan 25 press conference that some policymakers were surprised by the market reaction, adding that no discussions on communication had taken place thus far, beyond talking about when to have that conversation.

“If central banks are to use communication as a policy tool, they must not shy away from necessary guidance for fear of market backlash,” Weidmann said yesterday.

The ECB Threefold Guidance

Inflation Progress

One of the most vocal officials in favour of normalising policy, he expressed optimism about the ability of wages to bolster price pressures in the medium term, and pointed to the recent pay agreement in Germany’s metalworking and electrical engineering industries as an example of how declining slack in the labour market feeds through to higher remuneration.

Weidmann also called on governments to not view public finances as better than they actually are, warning that higher interest rates in the future could make current public-debt ratios a burden.

His French colleague Francois Villeroy de Galhau said in a speech in Frankfurt that he fully understands and shares a wide-spread concern in Germany that the ECB risks paralysing itself in the next crisis by keeping monetary policy too loose for too long.

“By the next recession — it will come one day, even if we have a robust expansion in the present — monetary policy will be at risk of being overwhelmed,” Villeroy de Galhau said. “This is a worry we should find a solution to in the strengthening of the economic union.”

His comments echo Executive Board member Benoit Coeure, who said last week that without reforms, the next crisis may force the ECB to test the limits of its mandate.

Asked on Twitter about his view on the matter, Praet tweeted: “It wouldn’t come to my mind to act beyond the law.” — Bloomberg