Monetary policy works with a long time lag, we all know that. But the debate about it happens in real time.
So that's why even as the European Central Bank maintains that the risks to the economy are still “on the downside,” a rash of positive economic data has economists turning their minds to how the region's flagship stimulus policy -- quantitative easing -- should be brought to a halt.
Without a “hard stop.” That's the advice of Societe Generale Global Head of Economics Michala Marcussen.
ECB President Mario Draghi says the asset-buying program will slow to 60 billion euros ($64 billion) a month from April, from 80 billion euros currently, and then stay at that pace until at least the end of this year. The consensus among economists surveyed by Bloomberg in January is that a wind-down, or tapering toward zero, won't start until 2018 at the earliest.
Marcussen contends that better growth outcomes and gaining prices may make it necessary for that process to be more rapid.
Data released Tuesday might back her case. Euro-area inflation surged to 1.8 percent in January, beating estimates in a Bloomberg survey and putting it effectively in line with the ECB's goal of just under 2 percent -- if it can be sustained at roughly that level. Unemployment was also better than forecast, dropping to 9.6 percent.
A discussion about a faster exit would assuage policy makers from Germany, who don't like the disconnect between accelerating consumer prices and interest rates that are set to stay at zero for a long time to come. The ECB has said it won't raise rates until well after it stops buying government bonds. QuickTake Read more about QE here.
And the longer QE goes on, the harder it will be to exit, Marcussen says, citing a looming shortage of government debt to buy.
“Tapering in a smooth manner takes the ECB away from the problem of suddenly having to have a hard stop,” she said during a briefing in Frankfurt on Tuesday.
Marcussen warns though that the region's recovery can easily be derailed by political tumult -- like an early election in Italy or the ascension to power of an anti-euro government in France or the Netherlands this year. The ECB would find it hard to taper in the midst of an event like that.
While the going is good though, there's an argument for winding down monetary support faster.
“If ever something goes wrong again, the more ammunition you have used up the less you have to fight with in the future.”