ECB's Mersch Says Risks to Growth Are Almost Back in Balance

  • Euro-area inflation weaker but ‘timid’ signs of price pressure
  • Says ECB could review the ‘interaction’ of its policy tools

The European Central Bank will soon be able to adopt a more optimistic tone on the euro-area economy -- a possible first step in winding down stimulus -- according to Executive Board member Yves Mersch.

“The recovery in the euro area is gaining more and more traction,” Mersch said in a speech in Tokyo on Monday. “The confirmation of a broadly balanced risk outlook for growth is within reach.”

Yves Mersch in Tokyo, May 8.

Photographer: Akio Kon/Bloomberg

The increasing resilience of the currency bloc in recent months has prompted some ECB officials to publicly debate when they might start to discuss ending asset purchases and raising interest rates. Mersch said that while policy makers don’t want to change their stated measures, they could review how well the tools work together.

“The Governing Council is convinced of the need to continue an accommodative monetary policy stance without deviation from the announced measures under implementation to be expected,” he said. “But we could examine the interaction of our different policy measures and their functioning in a new environment of balanced prospects, as opposed to the environment of deflationary risks that prevailed when they were first introduced.”

Mersch didn’t give specific policy options, and his adviser Juergen Schaaf declined to comment when asked to elaborate on what was meant by the reference to examining the interaction of measures.

Rate Signals

The ECB currently provides forward guidance that it expects rates to remain at present or lower levels until well past the end of its asset-purchase program, which is scheduled to run until at least the end of this year. Mersch argued in February that the reference to even-lower rates was probably no longer necessary.

In his speech on Monday, he said that unconventional measures should be used for no longer than necessary as they eventually weigh on bank profitability. He also cited a Bank for International Settlements study that found nominal rates affect monetary policy transmission independently of real rates, and that keeping them persistently low might damp spending. The ECB’s deposit rate is a record-low minus 0.4 percent.

“Common sense suggests Mersch must be talking about tweaking the forward guidance while still respecting the sequencing, but unfortunately you can’t completely rule out the possibility that the ECB has re-opened the sequencing debate yet again,” said Richard Barwell, an economist at BNP Paribas Investment Partners in London.

Austrian central-bank Governor Ewald Nowotny suggested in March that rates could rise before quantitative easing ends. That idea was knocked back by Executive Board member Peter Praet, the ECB’s chief economist.

Political Risks

Even so, Praet signaled last week that the time is approaching for a discussion on the central bank’s policy language. While insisting that the sequencing of measures must be maintained, he said in Brussels that the gap between the end of QE and the first rate hike is data-dependent and “it can be long, it can be short.”

Mersch spoke the day after Emmanuel Macron was proclaimed the winner of France’s presidential election, averting an anti-euro government that could have destabilized the currency bloc. His speech also came as data showed factory orders in Germany, the region’s largest economy, rising for a second month -- led by demand from the eurozone.

“Although we still face some risks, in particular regarding the external outlook, political uncertainties and fragilities have consistently evolved in a positive fashion in Europe since the beginning of the year,” he said. “If the euro-area economy recovers and inflation proceeds further on its path toward the ECB’s inflation aim in a sustained manner, a discussion on policy normalization becomes warranted in the future.”

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