ECB QE Tussle Heats Up as Rajoy Warns Against Hasty Withdrawal

Updated on
  • Spanish concerns come up against German calls for exit
  • Weidmann joins Lautenschlaeger in envisaging end of easing

The debate over the exit from the European Central Bank’s ultra-loose policies intensified as Spanish Prime Minister Mariano Rajoy expressed concern over a premature tightening.

Bundesbank President Jens Weidmann on Thursday joined Executive Board member Sabine Lautenschlaeger, a fellow German, in arguing that the time for a discussion on when to rein in stimulus is nearing. With policy makers from France to the Netherlands weighing in, a debate that is bound to dominate the coming months heated up earlier than expected as inflation accelerates, growth firms and the region’s major economies face a year of election campaigns.

Still, while central bankers start reflecting how to put an end to an unprecedented cycle of easing measures, there are voices warning that it is too early to deny the euro area’s modest recovery the support of the ECB’s policies. This foreshadows a potential conflict that will be made more complicated by the fact that central banks are now the largest holders of European government debt.

“Although I believe that the economic situation will be good this year, there are some things that worry me, such as Brexit, what could happen in the U.S., the oil price, and what the ECB could do,” Rajoy, Spain’s premier, said in an interview with Onda Cero radio on Thursday. “So far it is acting correctly.”

While ECB President Mario Draghi reiterated last week that the risks to the euro-area recovery remain tilted to the downside, inflation is accelerating. Lautenschlaeger has called for discussions “soon” on winding down the institution’s 2.28 trillion-euro ($2.45 trillion) bond-buying program. The loudest criticism of loose monetary policy comes from Germany, while weaker economies have warned that price rises are still driven too much by oil.

Exit Foundation

Weidmann, who has often criticized the ECB’s stimulus, said on Thursday evening that if current price developments continued they would lay the “foundation for an exit from loose monetary policy.” While an expansive policy remains appropriate, he added, “central bank shouldn’t become prisoners of the markets or of financial policy.”

Other policy makers also weighed in on Thursday, highlighting the divergence in views between officials shown in the Bloomberg Intelligence ECB Spectrometer. Executive Board member Yves Mersch said in Luxembourg that “once inflation is sustainably back to our objective, monetary policy will normalize.” Dutch central-bank governor Klaas Knot said in Berlin that “the tail risk of a deflationary spiral is no longer imminent, removing one important rationale for large-scale asset purchases.”

Governing Council member Francois Villeroy de Galhau said in Munich that the euro-area recovery is “not yet satisfactory” and ECB policy fits with German doctrine.

Latin Fantasy

“Our present monetary policy is very much in accordance with the German values that I fully share: independence, respect of the treaties, price stability and a long-term approach,” the French central-bank chief said. “Contrary to what some critics suggest, our monetary policy is not some sort of Latin fantasy.”

The decision-making Governing Council hasn’t yet considered exiting QE, which is set to run until at least the end of this year. The euro area’s inflation rate almost doubled to 1.1 percent last month, though that’s still well below the goal of just under 2 percent and was largely driven by higher energy costs. Policy makers have said they want to see a pickup in the core rate, which remains below 1 percent.

Ireland’s central bank said on Thursday that the “principal external risks to the euro area’s recovery include a sharper than expected rebound in energy prices,” as well as geopolitical tensions. That would “lead to higher production costs for euro-area producers,” it said in its quarterly bulletin.

Spanish consumer-price growth accelerated to 1.4 percent in December, while producer prices jumped 2.8 percent. Rajoy said prices are likely to keep rising in the first three months of the year and the economy, which has outperformed its euro-area peers, still faces risks.

German consumer-price growth surged to 1.7 percent in December -- prompting a media outcry -- and the Bundesbank predicted earlier this week it could reach a “good 2 percent” in January. The latest figures will be published on Monday. Lautenschlaeger said that while officials must be confident that euro-area price growth is sustained, the time is near to consider the end of QE.

“All preconditions for a stable rise in inflation exist,” she said in Hamburg on Tuesday. “I am thus optimistic that we can soon turn to the question of an exit.”

— With assistance by Mark Deen, Alessandro Speciale, Carolynn Look, Peter Flanagan, Esteban Duarte, Fred Pals, and Piotr Skolimowski

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