Photographer: Jasper Juinen/Bloomberg

ECB Stimulus Champions Signal QE to Endure as Economy Heals

  • Lane, Linde say market expectations on policy should be met
  • Economic confidence in euro area rises to 10-month high

European Central Bank officials signaled that they support extending asset buying beyond the earliest end-date of March, arguing that returning to a healthy level of inflation demands maintaining the pace as the economy heals.

Speaking in London on Friday, Irish central bank Governor Philip Lane said that the “broad narrative” in the market about the ECB’s strategy on bond purchases is that it will continue until inflation is heading reliably toward the target of just under 2 percent. His comments echoed remarks by Executive Board member Benoit Coeure at an event in Frankfurt and Spain’s Governor Luis Maria Linde in a newspaper.

“March was always an intermediate staging post,” said Lane. “The narrative of the euro area is that there’s been this moderate but sustained recovery, by and large driven by domestic factors, especially consumption. But inflation remains low compared to target and essentially that’s the assessment.”

Coming from ECB officials who have taken the more pro-stimulus side of the debate on the Governing Council, the comments may reflect a concern that the central bank will be pressed to end quantitative easing before the uptick in inflation is fully embedded. Though data showed fresh signs of economic resilience -- confidence rose to a 10-month high in the bloc -- price gains are still stuck far below target.

Data due for release on Monday will likely show that euro-area inflation accelerated to 0.5 percent in October from 0.4 percent the previous month. Investors will also receive third-quarter gross-domestic-product figures, which are forecast to confirm that the economy maintained its growth pace of 0.3 percent.

An index of executive and consumer sentiment in the region rose to 106.3 in October from 104.9 in September, the European Commission in Brussels said Friday. The French economy returned to growth in the July-September period, although the rate of expansion was weaker than analysts predicted, while Spain continued to outperform its neighbors.

The data offer a glimpse of the euro area’s economic performance after the U.K.’s decision to leave the European Union increased downside risks to the fragile and uneven recovery. 

To underpin growth and thereby boost inflation, the Frankfurt-based ECB is currently buying 80 billion euros ($87 billion) per month of public and private-sector assets as part of the QE program that began in March 2015. Amid increasing concerns that some assets -- particularly German government debt -- may become scarce, the central bank is conducting a review of the program that could see changes made in order to ensure it can be continued as long as needed.

Coeure, who oversees the ECB’s market operations, said on Friday that the Governing Council had an interim report from technical staff last week, and the debate at the December meeting will be about ensuring feasibility of the plan.

‘Other Actors’

“Monetary support for the recovery will continue until inflation is sustainably adjusting to our objective,” he said, while adding a warning that “other actors need to shoulder some of the burden.”

ECB President Mario Draghi has underlined in recent months that the central bank’s current inflation forecasts contain an assessment of what financial markets anticipate in terms of stimulus. In other words, policy makers will have to deliver on those expectations or risk tighter financial conditions, which will make it harder to reach their goal.

“It’s not advisable to give surprises to markets, therefore it’s about being as predictable as possible,” Spain’s Linde said in comments published by Expansion newspaper on Friday. “The initial date set to end the buying program is March, but the most advisable action is that it be a process that’s as slow as possible.”

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