ECB Stimulus Must Start Disappearing From January, Knot Says

  • Improved inflation data mean grounds for QE no longer in place
  • Knot sees interest rates only rising after tapering started

The European Central Bank should start to scale back its quantitative easing program from January, Governing Council member Klaas Knot said.

“Predictability of policy is important -- we have announced that we will continue the asset purchase program until December,” Knot, who is also the president of the Dutch Central Bank, said at a press conference in Amsterdam on Thursday. “After that it should be phased out as soon as possible, because the grounds for the program have disappeared.”

A broadening recovery in the euro area has so far allowed the currency bloc to weather a period fraught with uncertainties ranging from the U.K.’s Brexit vote to the U.S. administration’s trade policies, as well as a series of elections in the euro area. As momentum gathers and a mostly oil-driven spike in inflation firms, the ECB is coming under increasing pressure to plan an exit from its 2.28 trillion-euro ($2.5 trillion) bond-buying plan.

“The risk of deflation, as far as this was real at the start of the asset purchase program, has now disappeared,” Knot said. “Given the substantial size of liquidities in circulation and the already very low interest rate, the added value of more liquidity or an even lower interest rate will become more limited,” he said. “At this stage this will hardly boost credits, investments and consumption.”

Euro-area inflation accelerated to 2 percent in February, the fastest in four years. March inflation, which will be published on Friday, will probably show a reading of 1.8 percent, according to a Bloomberg survey. While that puts the rate effectively in line with the ECB’s goal -- technically just below 2 percent -- President Mario Draghi has consistently said he’s not convinced the upturn is sustainable just yet. His view is reinforced by the core inflation measure, still below 1 percent.

Sequencing

Once the ECB starts scaling back stimulus, this should be done in a gradual manner, with interest rate increases only coming after bond purchases have been tapered, Knot said.

“There is a logical order in the way we have so far communicated about the way we normalize monetary policy,” he said. “First tapering and only then raise the interest rate.”

However, Knot sees a rate hike soon after tapering has started. “The expectation in the market for the first interest rate raise of the ECB is moved from end 2019 to beginning of 2018. That is much closer to my own expectation,” Knot said in an interview with Dutch newspaper De Telegraaf on Thursday.

Only if the euro-area economy develops even more positively than the ECB forecasts could the discussion of tapering be brought forward, said Knot, who also heads the Dutch central bank and was presenting the institution’s annual report.

The ECB’s Governing Council holds its next policy-setting meeting on April 27. Economists surveyed by Bloomberg earlier this month said policy makers will wait until at least June before upgrading their assessment of the risks to recovery and won’t announce another reduction in bond purchases until September.

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