ECB’s Stimulus Exit Might Be Slower Than You Think

  • Any change in policy language in June may be minimal
  • Idea that stimulus sequence might change said to be quashed

Brugel's Papadia Sees ECB Completing Taper in 2018

The European Central Bank is trying to work out a key question about the road to policy normalization: what’s the speed limit?

Three weeks before their next policy decision, the terms of debate between the ECB’s 25 Governing Council members over announcing and implementing an exit from unconventional stimulus have coalesced around the pace. In one camp are those who want to move slowly. In the opposite camp: those who want to move extremely slowly.

The June 8 meeting in Tallinn is in the sights of investors and economists seeking a signal that the euro area has recovered enough for the the ECB to at least hold its first formal talks on what a policy reversal might look like. But while officials might agree that the risks to growth are now balanced instead of tilted to the downside, concerns about lackluster price pressures may see the issue of when and how to wind down the 2.3 trillion-euro ($2.6 trillion) bond-buying program put off for months.

“There seems to be no real urgency to change the language substantially until there are convincing signs of a pickup in underlying inflation, and the costs of waiting are not very high,” said Ben May, an economist at Oxford Economics Ltd. in London. “You really don’t want to say anything strong and run the risk that markets get the wrong end of the stick as that could dampen the recovery.”

The message that there is no rush to signal a change in the ultra-accommodative stance has been driven by warnings from heavyweights on the six-member Executive Board, who’ve upheld their forward guidance.

No Traction

The idea floated by Austrian governor Ewald Nowotny earlier this year that interest rates could be lifted before quantitative easing ends, in contrast to the ECB’s current intention to wait until “well past” the end of bond purchases, failed to gain traction and now has almost no support, according to euro-area officials familiar with the matter. The officials asked not to be identified because informal discussions between policy makers are private. A spokesman for the central bank declined to comment.

Executive Board member Peter Praet -- the chief economist and the person who makes the board’s monetary-policy proposal to the Governing Council -- has been the most vociferous defender of the status quo. He said on Monday that “you cannot change the stance very abruptly” and has repeatedly said the sequence of ending QE before raising rates, as practiced by the U.S. Federal Reserve, has a “strong logic.”

Elsewhere on the Executive Board, President Mario Draghi signaled his caution in an appearance before Dutch lawmakers last week when he said it’s too early to declare success in the battle to revive consumer prices. Vice President Vitor Constancio said “loose for longer” is a less-risky strategy for monetary policy than premature withdrawal, and that a decision on QE might not come until after summer.

Legitimate Discussion

German officials, among the greatest critics of QE, have been relatively subdued lately on the topic of ending the program. Governing Council member Jens Weidmann has said little more than that a discussion is “legitimate,” while Executive Board member Sabine Lautenschlaeger has stuck to commenting on the banking industry after calling in January for talks on a gradual exit to start “soon.”

The solidifying recovery -- even amid risks such as euro-area elections, the U.K.’s talks on leaving the European Union, and uncertainty over the U.S. stance on trade -- was highlighted in data on Tuesday that confirmed a 16th straight quarter of expansion. Economic confidence is at the highest level in almost a decade, and purchasing managers indexes show the private sector strengthening.

Key to June’s decision may be whether official economic reports prove to be as strong as the sentiment surveys. Praet said he sees a “question mark” between the hard and soft data.

The momentum so far is certainly uneven, with Greece falling back into recession and euro-area industrial output dropping in February and March. Inflation may be at 1.9 percent, in line with the ECB’s goal, but policy makers still lack confidence that it would hold up if stimulus was removed. Praet has cited concerns over feeble wage growth, saying that even a pickup could take a couple of years to feed into consumer-price figures.

“While policy makers seem to be coming from different perspectives, their views seems to be converging toward a very gradual and slow shift in language followed by tapering next year,” said Nick Kounis, an economist at ABN Amro Bank NV in Amsterdam.

— With assistance by Alessandro Speciale, Boris Groendahl, and Esteban Duarte

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