ECB Doesn’t Need New Stimulus to Hit Goal, Policy Maker Says

The Shock and Awe of ECB Corporate Bond-Buying
  • Slovenian central-bank chief comments in Bloomberg interview
  • Says inflation would return faster with better policy mix

The European Central Bank has pledged enough stimulus to return euro-area inflation to its goal, policy maker Bostjan Jazbec said, in a sign that officials may sit tight over the summer months.

“At the current juncture, I’d firmly confirm that the measures work and that we can only look forward to responding to everything that comes to our table,” Jazbec, the Slovenian central-bank governor, said in an interview in Ljubljana on Thursday. “Of course, if you ask is there anything more we can do, my answer would always be yes. But is it needed today? No.”

Bostjan Jazbec
Bostjan Jazbec
Photographer: Chris Ratcliffe/Bloomberg

Inflation has missed the ECB’s target of just under 2 percent for more than three years, and hasn’t been above zero since January, prompting the Governing Council to ramp up stimulus yet again in March. While economists surveyed by Bloomberg see fresh measures being needed before the end of the year, Jazbec said updated staff forecasts indicate that the central bank’s existing measures could be sufficient.

The projections published this month, showing that inflation should average 1.6 percent in 2018, are “exactly close to our goal,” he said.

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The 46-year-old governor’s comments come amid international concern that central-bank policies are near the limit of their effectiveness, and pressure for governments to be more proactive. ECB President Mario Draghi said on Thursday that delaying structural reforms in the euro area for domestic political reasons would slow the impact of monetary stimulus and come with an economic cost that is “simply too high.”

Jazbec, seen as a relatively hawkish Governing Council member, spoke in his office in the Slovenian central bank, at a desk stacked with recent books on economics and history by authors such as Ben S. Bernanke, Adair Turner, Thomas Piketty and Mary Beard.

“We all read and we all learned from the same books and those books will always stress the importance of a policy mix,” he said. “Today an enormous pressure and responsibility lies on monetary policy, while it is obvious that monetary policy would be even more successful if other policies were to complement it.”

Jens Weidmann, president of Germany’s Bundesbank and a long-time critic of how far the ECB has pushed its stimulus, gave his view on the interplay of different policy areas on Friday. He called for a “virtuous circle” of sound monetary, fiscal and financial stances to safeguard economic stability, and criticized governments.

“The euro area still has a long way to go, especially with regard to fiscal policy,” he said at a conference in Eltville, Germany. “Unfortunately, the spillover from monetary policy -- savings through lower interest expenses -- has not been used as much as it could to press ahead with improving public budgets.”

Jazbec noted that near-term risks including the refugee crisis, Greece’s aid negotiations and the U.K.’s referendum on its European Union membership are also weighing on the economy.

“You would hardly find an investor who would consciously invest into an uncertain environment, even if interest rates indicate these are the right times to increase your investment,” he said.

A more fundamental problem in the currency bloc is a lack of demand. The central bank is providing the easy credit conditions under which demand can grow, but that will only happen if governments act in tandem with the ECB, he said.

“This is exactly how I see quantitative easing,” he said. “We generated an environment where other policies can come and take their fair share in what we call the policy mix in a way which would be beneficial for all of us, not only particular countries.”

The ECB is buying 80 billion euros ($91 billion) a month in public and private debt, and extended the program to corporate bonds this week. Its deposit rate was cut to minus 0.4 percent and the main refinancing rate to zero in March, and a program starts this month that could see lenders paid to take long-term loans from the central bank.

Most economists surveyed by Bloomberg before the June policy meeting said Draghi will announce more stimulus this year, most likely an extension of QE past the current end-date of March 2017. Jazbec said it’s too early to judge whether that will be necessary.

“We look at current numbers, we look at current developments, and it’s too soon to say anything on the way things develop,” he said. “What we see today is that measures were right and appropriate; that they work.”

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