Praet Urges Patience as Mersch Says ECB Could Review QE MakeupBy and
Chief economist says inflation expectations must still improve
Separately, Mersch refers to ‘compositional discussion’ on QE
Peter Praet called for patience and persistence in European Central Bank stimulus, as his colleague Yves Mersch said policy makers should review the composition of bond purchases.
“We need to be patient, because inflation convergence needs more time to show through convincingly in the data,” Praet, an ECB Executive Board member, said in a speech to the Fixed Income Market Colloquium in Rome on Tuesday. “And we need to be persistent, because the baseline scenario for future inflation remains crucially contingent on very easy financing conditions which, to a large extent, depend on the current accommodative monetary policy stance.”
The comments echo similar language used after the June rate decision by the ECB president before his subsequent remarks on the path of stimulus withdrawal sparked a bout of market volatility last week. Investors zoomed in on remarks by Mario Draghi that there was room to tweak stimulus measures, sending bond yields and the euro surging, even though the speech was intended to strike a balance between recognizing an improved growth outlook and warning that monetary support is still needed.
The ECB next meets to set policy on July 20, though most economists foresee any major change being put off until at least the following meeting in September.
Praet argued that the euro area’s economic environment is improving. Higher expected returns on business investment are set to make borrowing conditions increasingly attractive, thus reinforcing monetary accommodation, he said, adding that inflation rates will gradually move toward the ECB’s goal of below but close to 2 percent.
“But our mission is not yet accomplished,” he said. “Measured inflation remains exceedingly volatile and metrics of underlying price pressures continue to be subdued. The entire distribution of inflation expectations still needs to shift a fair distance to the right.”
Praet’s sentiment was echoed by Governing Council member Ewald Nowotny at an event in Vienna, where he said policy must be normalized as soon as the economy allows, but that a “steady hand” is needed.
Monetary policy “works, even if it does so with considerable delays,” the Austrian central-bank governor said. “We again have a revival in investment, and together with the recovery of exports that’s a significant reason for the clear upturn that we now see in Europe.”
The ECB has used negative interest rates, free bank loans and a 2.3 trillion-euro ($2.6 trillion) bond-purchasing program to try to restore price stability. The institution is currently spending 60 billion euros a month on government and agency debt, corporate bonds, covered bonds and asset-backed securities, and intends to maintain that pace until at least the end of this year. It hasn’t yet decided whether buying should be wound down in 2018.
Mersch, speaking in Frankfurt on Tuesday, said the ECB will have a “compositional discussion” on QE, without elaborating on what that might entail. His speech largely focused on ABS, by far the smallest portion of purchases.
“It is no secret that the revival of the European ABS market is, broadly speaking, still anemic,” he said. The central bank will “in the not too distant future have to review the specific role of ABS in the context of the broader issue of QE beyond 2017.”