Coeure Sees Previous QE Cutback as Model for Next ECB Moves

  • Stimulus tools can be adapted as economic recovery progresses
  • ECB must be transparent in communications, board member says

The European Central Bank will use its action last December as a blueprint for how to adjust monetary policy going forward, according to Executive Board member Benoit Coeure.

Criticizing some central-bank observers for seeing the ECB’s choices as being between traumatizing the markets with every small move, and putting the institution on a forced march to normalization, Coeure said “the reality is quite different.” He told Le Monde and La Stampa that December’s announcement of a cut in monthly bond purchases to 60 billion euros ($68 billion) from 80 billion euros, which took effect in April, was an example of how carefully it shifts stimulus.

Benoit Coeure

Photographer: Alex Kraus/Bloomberg

“We scaled back our asset purchases without undermining the support given to the economy; so I would argue that we have already adjusted our monetary policy, and this was made possible by the continued improvement in the economic situation,” he said. “If needed, the Governing Council will continue to adjust its instruments both qualitatively and quantitatively. But when this is needed, it should do so carefully and flexibly, and based on what matters for us within the framework of our mandate: the inflation outlook.”

At the time of that announcement, President Mario Draghi argued the move reflected diminished risks of deflation but that “there is no tapering in sight.” While he has mostly maintained that dovish tone since, he sent the euro and bond yields soaring last week when he said the strengthening euro-area economy may create room to adjust stimulus without tightening financial conditions.

Economic Circumstances

Governing Council member Klaas Knot, a frequent critic of ultra-loose policy, told Bloomberg on the sidelines of a conference in Ohrid, Republic of Macedonia, on Friday that monetary policy will ultimately respond to economic fundamentals.

“Our monetary policy decisions will always be dictated by the economic circumstances and not instrument availability,” he said. “The economic circumstances at this point are that reflation has clearly replaced deflation -- the deflation risk is gone.”

His comments follow a speech on Thursday by his German colleague Jens Weidmann, who also sees the improving economy paving the way for an exit from unconventional stimulus.

“The continued economic recovery is opening the perspective of a monetary-policy normalization,” the Bundesbank president said in Vienna, where he spoke alongside his Austrian counterpart Ewald Nowotny. “For the credibility of monetary policy, it is decisive that the expansionary monetary policy is ended when it becomes necessary from a price-stability perspective.”

Still, tapering hasn’t yet been formally discussed by the Governing Council even though the bond-buying program is only scheduled to run until the end of this year. Coeure, who is responsible for the ECB’s market operations, including QE, warned of the risks of staying silent on the topic for too long.

“We must be transparent in our communications on these developments,” he said. “Otherwise we run the risk of a more abrupt adjustment for the markets when the decisions are actually taken.”

— With assistance by Rudy Ruitenberg

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