ECB Frets Over Bond Purchases With Year-End Deadline in Mind

  • Constancio signals QE plan may not come until after summer
  • Weidmann warns of risks as Knot says program disappointing

European Central Bank officials resumed their public debate over the future of their bond-buying plan as some policy makers criticized its impact.

Vice President Vitor Constancio said that an announcement on the 2.3 trillion-euro ($2.6 trillion) program must come before the end of the year, when it is currently scheduled to finish, but the decision may not be taken until after the summer. Germany’s central-bank chief warned that governments may become dependent on depressed bond yields, and the Dutch governor said the effect on inflation has been disappointing.

“We are committed to a certain level of purchases until December which means that before December we will have to say something,” Constancio told reporters at a conference in Rome on Wednesday. “So it could be very well in autumn, but certainly before the end of the year we have to take a decision and make an announcement to the market about the future of the program, whatever the future of the program will be.”

After years of stimulus from quantitative easing and negative interest rates, the ECB has managed to spur economic growth but has so far failed to turn that into sustainable inflation at its goal of just under 2 percent. Data on Friday will probably confirm that consumer-price growth eased to 1.4 percent last month from 1.9 percent.

Muddy Waters

The effect of stimulus “is mainly on keeping the economic recovery going,” Dutch central-bank head Klaas Knot told lawmakers in The Hague. “The effect on inflation is, to be honest, disappointing”

Bundesbank President Jens Weidmann, a long-time skeptic of QE, warned that the longer the central bank keeps buying government debt, which accounts for the bulk of the program, the harder it might be to stop.

By muddying the waters between monetary and fiscal policy, “this can lead to political pressure being exerted on the eurosystem to maintain the very accommodative monetary policy for longer than appropriate from a price-stability standpoint,” he said on Wednesday in Frankfurt. “In the context of these asset purchases, changes in monetary policy impact more directly on governments’ funding costs than interest-rate moves.”

Jens Weidmann

Photographer: Andrew Harrer/Bloomberg

The comments come just days after the ECB said the risks to economic growth are now broadly balanced instead of tilted to the downside, and dropped its forward guidance that rates might fall further. Still, the Governing Council didn’t discuss how it might wind down QE, and President Mario Draghi used his subsequent press conference to say that patience is needed.

‘Incremental Approach’

Speaking in Tallinn, Estonian Governor Ardo Hansson said that the key point of discussion now is how fast the ECB can afford to change its stance.

“Since we can’t, we don’t want to, stop overnight, we need to continue,” he said. “There’s an issue of calibrating and that’s exactly what’s being discussed right now. Everybody is in a sense taking an incremental approach, the question is the degree of incrementalism.”

The pace of the recovery was highlighted again on Wednesday by data showing euro-area employment rose 1.5 percent at the start of the year, taking the annual rate of growth to its fastest since before the financial crisis.

Even so, there are considerable differences across the currency bloc, with momentum in countries such as Germany or Spain outperforming Italy and Greece, and government finances far weaker in some nations than others. Weidmann suggested that QE could be causing a problem by masking those variations.

Sovereign-bond purchases are “more problematic in view of the disciplining effect of the capital markets on government finances,” he said. “This is a risk for the euro area in particular, as risk differentiation between the different countries is significantly reduced.”

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