ECB's Nowotny Criticizes `Absurd' Expectations for Stimulus

  • Austrian central-bank head says analysts misread fundamentals
  • Says `massive failing' concentrated among investors in London

European Central Bank policy maker Ewald Nowotny said the financial community misjudged the state of the euro-area economy and thus had unrealistic expectations for more stimulus last week.

“It was absurd what expectations were expressed,” Governing Council member Nowotny told reporters in Vienna on Wednesday. “I believe it was really a massive failing of market analysts. I don’t believe the ECB’s communications policy gave a false signal.”

Ewald Nowotny

Photographer: Lisi Niesner/Bloomberg

The euro and bond yields surged on Dec. 3 after ECB President Mario Draghi announced a “recalibration” of the central bank’s stimulus program that disappointed investors. While Draghi used a speech in New York the following day to add more detail and insist the program will achieve its goal of reviving euro-area inflation, markets have failed to return to pre-policy-meeting levels.

The euro has climbed about 3 percent since Draghi’s stimulus announcement. It traded at $1.0938 at 1:45 p.m. Vienna time on Wednesday, up 0.4 percent on the day. The yield on German 10-year debt was at 0.58 percent, compared with a yield as low as 0.46 percent on Dec. 3.

London Bets

Bets on an aggressive stimulus package had risen in the run-up to the Governing Council’s meeting, in part because of statements by Draghi that policy makers would “do what we must” to spur consumer prices, and by Executive Board member Peter Praet, the institution’s chief economist, that there was a risk of inflation expectations becoming de-anchored.

While the ECB cut its deposit rate, extended the duration of quantitative easing and said it will reinvest the proceeds of maturing debt, it didn’t increase monthly debt purchases from the current 60 billion euros ($66 billion). Most economists surveyed by Bloomberg had predicted it would do so.

“It’s our job to call the ECB, so he’s right to say it’s our fault,” said Richard Barwell, senior economist at BNP Paribas Investment Partners in London. “However, if I was a member of the Governing Council, I’m not sure I would describe expectations that the ECB would increase the pace of bond purchases to drive inflation back to 2 percent as quickly as possible as absurd.”

Asked why ECB officials didn’t speak out to rein in the market before the meeting, Nowotny said that would go beyond a central bank’s job.

“A central bank has to do what it considers right,” he said. “I don’t believe that it’s the task of the central bank to correct the misconceptions of individuals. It wasn’t the general view, rather individual views that were particularly concentrated in London.”

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