Nowotny Says Europe’s Good News Removes ECB Cut Motive
European Central Bank Governing Council Member Ewald Nowotny said the recent “stream of good news” from the euro-area economy has removed any need to cut interest rates to a fresh record low.
“I would not see many arguments now for a rate cut,” Nowotny, who heads Austria’s central bank, said in an interview with Bloomberg Television in Jackson Hole, Wyoming, late yesterday. At the same time, he ruled out an early monetary tightening, saying “the most recent developments will have no immediate effects on the policy of the European Central Bank.”
With the euro area emerging from its longest-ever recession last quarter, ECB officials are seeking to quell any speculation that they will shift to tighter policy prematurely. President Mario Draghi has pledged to keep the ECB’s benchmark rate at a record low of 0.5 percent for an “extended period,” and board member Peter Praet said on Aug. 6 that “further cuts in policy rates remain an option.”
That hasn’t stopped the forward rates for Effective Overnight Index Average swaps, a measure of expected overnight interbank borrowing costs, from climbing. The rate banks expect to charge each other by the ECB’s July 2014 policy meeting was at 0.29 percent yesterday, up from 0.15 percent on July 5, the day after Draghi first made the commitment.
The euro strengthened after Nowotny’s comments were published, climbing about a quarter of a U.S. cent to $1.3361.
The euro-area economy expanded 0.3 percent in the second quarter from the first, and data this week indicated the return to growth will be sustained. Services expanded in August for the first time in 19 months, led by Germany, and construction output rose for a third month in June.
“It is a weak recovery, but it is a recovery,” said Nowotny, who described himself as “cautiously optimistic” about the outlook as the ECB prepares new economic forecasts for release next month.
Amid the signs of a pickup, Citigroup Inc. economists this week said they no longer expect the ECB to cut its benchmark rate again this year.
“What has proved to be a positive strategy is to have this steady-hand approach,” Nowotny said.
There are still discussions about whether the ECB could do anything to improve transmission of its easy policy to all parts of the economy, such as small businesses, he said.
“It makes sense to think about it,” Nowotny said. “It’s not so easy to be solved, especially with the instruments that we have at the ECB.”
Nowotny was skeptical about whether the central bank should begin releasing minutes of its policy discussions along with details of how the Governing Council’s 23 members voted. The ECB now keeps such papers out of the public eye for 30 years to avoid policy makers facing criticism of their views in their home economies.
ECB Executive Board members Benoit Coeure and Jorg Asmussen last month joined the chorus calling for the ECB to match counterparts elsewhere by producing more timely minutes in the interest of transparency and accountability. Asmussen said the minutes should contain details of how and why individual officials voted.
“My personal view is that of the founding fathers of the ECB,” Nowotny said. “They were very cautious to secure the independence of the ECB by not giving minutes on the individual votes of the members of the Governing Council.”
Unlike the U.S. Federal Reserve, the ECB sets uniform policy for 17 economies “with different policy perspectives, so for me the priority is preserving the independence of the ECB,” Nowotny said.
He said it was too soon for anyone to give a “concrete answer” on whether Greece would require another bailout.
“The markets have seen there is both the willingness and the power to secure a kind of positive approach to the Greek problem,” Nowotny said.
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