The European Central Bank’s newest stimulus package has had an impact on markets and there is no urgency to take additional steps, according to Governing Council member Ewald Nowotny.
“I do not see a need for further action in the near future, at least not in the field of monetary policy,” Nowotny said in an interview in London yesterday. “One should be quite aware of the fact that monetary policy has its limits.”
The central bank’s historic measures last month included a negative deposit rate and targeted long-term loans to banks to fight the threat of deflation in the 18-nation euro area. While ECB President Mario Draghi has said policy makers are willing to use more radical measures such as broad-based asset purchases if needed, Nowotny’s comments signal that agreement on any action shouldn’t be taken for granted.
“We do already see some positive results -- that refers to both a certain easing of financing conditions on the European level and also to the tendency of being able to have stopped the appreciation of the euro,” he said. “Let’s wait and see how this is developing. I’m strictly against this attitude that the ECB should show a new trick at every meeting.”
Since the stimulus was announced on June 5, bond yields have tumbled and overnight interbank borrowing costs have fallen close to zero. The euro rose on yesterday’s comments and traded at $1.3621 at 10:24 a.m. in Frankfurt today. The single currency has fluctuated around $1.36 since June, after climbing as high as $1.3993 in May, and Nowotny signaled that he’s comfortable with the current level.
“We’ve reached a certain stabilization,” he said. The exchange rate is not a policy target in itself and direct intervention in the market is “definitely not part of our policy instruments,” he said.
Nowotny, 70, is one of the longest-serving of the 24 members of the ECB’s decision-making Governing Council and is currently in his second term as the head of Austria’s central bank, a position he has held since 2008. He was previously a professor at the Vienna University of Economics and Business Administration and chief executive of Austria’s Bawag PSK Bank.
Nowotny said there is no need for the ECB to act because there is no imminent risk of broad deflation, or a negative spiral of price declines and households postponing their spending plans.
“What we see just now is that inflation expectations are well anchored,” he said. “We would be prepared to take unconventional measures within our mandate if we see that there would be a very prolonged period of time of diverging from our definition of price stability.”
Inflation in the currency bloc was unchanged at 0.5 percent in June and has been under 1 percent for nine months. The ECB’s goal is close to but below 2 percent.
The central bank predicts consumer-price gains will average 0.7 percent this year and accelerate to 1.4 percent in 2016. If that’s the case, policy makers will hold off from raising interest rates at least until then, Nowotny signaled.
“As long as we have a very clear situation of inflation being substantially below this goal I think that we will have to stick to our forward guidance” of keeping rates low, he said. “Unfortunately, for the next two years there is that perspective that we will still be substantially below this 2 percent goal.”
Ultra-low inflation has prompted global policy makers including Christine Lagarde, the managing director of the International Monetary Fund, to urge the ECB to engage in broad-based asset purchases. Nowotny said that “is not the really relevant discussion we have now.”
The ECB said this month that it is intensifying work on a plan that could see it buy asset-backed securities linked to loans to small- and medium-sized enterprises. Even that policy might be hard to realize and could yet be abandoned, according to Nowotny, who said buying ABS in Europe is much more difficult than in the U.S. and the U.K. in part because of legal obstacles.
“If we’re not able to come up with some kind of plan this year, the conclusion should be that, unfortunately, it is too difficult for Europe, given the material differences, and that it would make no sense,” he said. “This should not be an endless story, this should be a story with results.”