ECB Should Wait Longer Before Exit Signal, Council Member Saysby and
Governing Council member says growth risks are now balanced
Policy makers must move cautiously to avoid surprising market
The European Central Bank should use its June meeting to start building the case for unwinding its monetary stimulus before making an announcement in the fall, according to Governing Council member Vitas Vasiliauskas.
The ECB should say the risks to the euro area’s economic growth are now balanced, and consider changing its forward guidance to reflect that it’s more likely to tighten than ease monetary policy, the Lithuanian central-bank governor said in an interview in Frankfurt on Thursday. Even so, he urged caution and said he sees no reason to change the intended sequencing of an exit from its measures.
“With regard to possible decisions, I would wait for maybe autumn,” said Vasiliauskas, 43. Holding off until December “would probably be too late, because then you have not enough space or room before the program ends.”
Three weeks before the Governing Council’s meeting in Tallinn, a consensus is forming that officials need to start preparing the market for an end to bond purchases and -- eventually -- negative rates. The focus of the debate is now largely on the pace of change, with some policy makers saying that the process can be drawn out and others concerned over the risks of moving too slowly.
The ECB’s guidance currently states that it intends to keep buying 60 billion euros ($66 billion) a month of debt until at least the end of December, and that it could increase that volume if needed. It also says interest rates will stay at “present or lower levels” until “well past” the end of quantitative easing.
“Everybody is prepared to discuss forward guidance in June, and my personal view is we take a look into the hard data and then we’ll discuss the speed of changing of communication,” Vasiliauskas said. “I don’t want to make big surprises for the markets.”
He said he doesn’t see “any worries for the moment” that a scarcity of bonds could mean QE running up against the self-imposed limits of the program, and that the parameters could change if needed.
The ECB’s chief economist, Executive Board member Peter Praet, has argued for extreme caution in signaling and implementing the removal of stimulus, saying the real economy still has to catch up with the buoyant sentiment in surveys. That position has been largely backed by Vice President Vitor Constancio.
Still, Executive Board member Benoit Coeure warned on Thursday that policy makers can’t wait too long, saying that if communication deviates from economic reality then there is a risk of more market volatility when decisions are taken. He returned to the topic in his speech on Friday in Geneva, where he stressed that monetary policy can’t “run the economy hot” to help reduce unemployment, as that falls outside the central bank’s remit.
Vasiliauskas defended the plan to finish QE first and only starting to raise rates later, saying any talk of lifting borrowing costs is premature.
“My way of thinking is to prioritize,” he said. “We have to speak about the balance of risks, then we should discuss and say something on the easing biases, then the program, and only then rates.”
Coeure has said that if the record-low deposit rate, at minus 0.4 percent, starts to impair the ability of banks to transmit monetary policy then there would be case for raising it. Vasiliauskas cautiously agree with that view.
“If it’s damaging then yes, but for this kind of decision we need to have evidence,” Vasiliauskas said. “The new reality, inefficiency, non-performing loans and other classical factors make a negative impact on the banking sector rather than the transmission mechanism and negative interest rates.”
As the ECB prepares for the June 8 meeting in the Estonian capital, he said his impression is that most officials agree that they need to send a clear message and move at a cautious pace.
“I don’t think now we have big noise,” Vasiliauskas said. “Personally I feel very comfortable.”