ECB Leadership Doubles Down on Guidance as June Meeting NearsBy , , and
Draghi sees no reason to deviate from current policy path
Constancio prefers to take decision closer to year-end
Mario Draghi is leading a push to stamp out any speculation that the European Central Bank might raise interest rates before it ends quantitative easing.
Speaking in Madrid, the ECB president reaffirmed the “logic” of the current sequencing, arguing that the unwarranted side effects of negative rates are likely to be less of a problem than those potentially produced by asset purchases. Along with his deputy Vitor Constancio and Executive Board member Peter Praet, he urged investors waiting for a signal on the path of policy normalization to be patient, signaling that June might not be the time for big decisions.
The central bank’s leadership has been relatively outspoken ahead of next month’s Governing Council, which presents an opportunity to set the course for an exit from unconventional stimulus. While policy makers are still striking diverging notes over the speed they should communicate and implement the withdrawal of non-standard tools, Draghi’s latest comments reflect a desire to quash any talk that the order might change.
“There is no reason to deviate from the indications we have been consistently providing in the introductory statement to our press conferences,” Draghi said on Wednesday. “Asset purchases are inevitably more difficult to calibrate, more complex to implement, and more likely to produce side effects than other instruments, including moderately negative rates.”
The ECB currently says it expects rates to stay at current or lower levels until well after the end of quantitative easing. Bond purchases are scheduled to run until at least the end of this year, and investors and economists are looking for hints that the program will be tapered in 2018.
Draghi was speaking on the interaction between monetary policy and financial stability, hours after Constancio presented the ECB’s semiannual Financial Stability Review. The central bank said there is a greater chance of a bond-repricing shock, but that financial stress is generally “contained.”
The ECB chief reiterated that the euro-area recovery is proving resilient and has become “increasingly broad-based” across countries and sectors, saying it’s driven predominantly by a “virtuous circle” of employment and consumption.
Growth above potential and inflation that is nominally in line with the ECB’s goal have raised speculation among investors that an exit is near. Governing Council member Vitas Vasiliauskas said in a Bloomberg interview last week that officials should use their June 8 meeting in Tallinn to start building the case for unwinding stimulus before making an announcement in the fall.
Constancio expressed his preference for a decision later in 2017, arguing that domestic price pressures are still mostly absent, and said investors would be satisfied with that.
“We are committed explicitly with certain policy instruments until the end of the year, and we have to take decisions then about the future, before the end of the year -- in my perspective closer to the end of the year,” he told Bloomberg Television in an interview in Frankfurt. “Markets understand that very well, so I do not fear any problems or turbulence resulting from our monetary-policy decisions going forward.”
Praet, speaking in Sofia, also urged caution.
“We are not yet there, we have to learn to be patient,” he said. “It’s a debate for the coming weeks, coming months to say to what extent we have confidence in” the projected path of inflation and “to what extent --if you start withdrawing accommodation -- this inflation path is sustained.”
Policy makers will base their eventual decision partly on updated economic projections, which will be available when they gather in the Estonian capital for one of their occasional out-of-Frankfurt meetings. Those forecasts may provide the basis for a discussion about whether the risks to the region’s economy should still be described as on the downside.
Executive Board member Benoit Coeure has argued for the past four weeks that the risk balance has tipped and is now “by and large flat.” He warned last week that “too much gradualism” in adjusting the ECB’s policy stance bears the risk of larger market adjustments once decisions are finally taken. Even so, he also defended the current plan to finish QE before raising rates.
“The secondary effects of monetary policy aren’t a reason to change the guidance we have given,” he said at en event in Paris on Tuesday.
Draghi will have another opportunity to present his case on Monday, when he testifies at the European Parliament in Brussels. He’s likely to reiterate the argument he made in Madrid that while negative rates have side effects, such as squeezing bank profitability, the unintended consequences of bond purchases could be worse.
“The doves remain in control for now, and how gradually they moved to pave the way for dropping the easing bias on rates tells you they really want to be on the cautious side when they exit,” said Marco Valli, an economist at UniCredit SpA in Milan. “The lack of underlying price pressure allows such approach.”