ECB Faces December Debate With Officials Still Split on More QE

  • Constancio says risks to economic outlook still to downside
  • Hansson says incoming data don't signal need for more action

European Central Bank policy makers are signaling that they face a difficult debate next week when they meet to consider fresh stimulus for the euro area, with some arguing that incoming data shows no need to act.

ECB Vice President Vitor Constancio said on Wednesday that the balance of risks is negative and the institution’s revised macroeconomic forecasts will be key to the final decision. Governing Council member Ardo Hansson said latest data has surprised to the upside and he sees no reason to do more, echoing views expressed by German policy makers.

The Frankfurt-based ECB is considering whether to step up measures to prevent too-low inflation becoming entrenched by the global economic slowdown, with options including an expansion of its 1.1-trillion euro ($1.2 trillion) bond-buying program and cutting the deposit rate further below zero. The Governing Council will make a decision on Dec. 3, when it will also have to consider what the impact of a pending U.S. interest-rate increase could be.

Spillover Risk

“The recovery is ongoing but the risks are to the downside and that’s one of the elements if indeed the spillover to emerging markets will materialize in a significant way,” Constancio said in a Bloomberg Television interview. “We have inflation which is very low and we want to ensure price stability.”

Euro-area inflation was 0.1 percent in October, compared with a medium-term goal of just under 2 percent. In the ECB’s last forecasts in September, it predicted consumer-price growth would climb to an average of 1.7 percent in 2017. Any reduction in that outlook would bolster the case for more stimulus.

Hansson, who heads Estonia’s central bank, noted that recent measures of confidence in the 19-nation currency bloc have improved. A composite purchasing managers’ survey by Markit Economics and a European Commission index of consumer optimism published this month both beat the median estimates in Bloomberg surveys of economists. The commission’s gauge of economic confidence will be published on Friday.

‘On Track’

“Knowing what I know now and going into next week’s policy meeting with a set of views -- always being willing to be convinced otherwise -- I see more positive than negative news since our last policy meeting,” Hansson said in an interview with Market News published Wednesday. “If everything seems to indicate that the economy is very much on track then I do not see a reason to act.”

Executive Board member Sabine Lautenschlaeger said in a speech on Monday in Munich that the ECB shouldn’t undertake any further monetary-stimulus measures for now. Governing Council member Jens Weidmann, the head of Germany’s Bundesbank, said last week that current stimulus needs time to work and there’s no need to paint a gloomy picture of the economy.

ECB President Mario Draghi, at the same event as Weidmann, said policy makers “will do what we must to raise inflation as quickly as possible.” Backing Draghi’s sentiment, outgoing governor of Ireland’s central bank, Patrick Honohan, told reporters in Dublin on Wednesday that inflation still isn’t moving up despite the stimulus measures already taken.

“They need to keep the foot on the accommodation pedal,” he said.

No Contagion

Constancio said that an increase in U.S. rates for the first time since 2006 should be manageable from a euro-area perspective. Federal Reserve policy makers will meet Dec. 15-16.

“We don’t expect the effect of the increase in rates in the U.S. will have a direct contagion in Europe,” he said. “The situation of our economies is different, the fundamentals are different, the monetary policies are different and it will become even more different after that decision when it comes.”

The ECB vice president declined to comment on a Reuters report published Wednesday that said the ECB is considering a two-tiered deposit rate among a range of 20 possible measures. The report cited unidentified officials familiar with the matter. The deposit rate is currently at minus 0.2 percent.

“We take the article with a pinch of salt,” Greg Fuzesi, an economist at JPMorgan Chase & Co. in London, said in a note. “But, as we noted last week, the risk is likely skewed towards the ECB doing more than we have penciled in, even if it is laying out a pretty muddled case for it and even if some governors do not see any need to act at all.”

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