Praet Says ECB Will Focus Guidance on Interest Rates as QE Ends

  • Communication has helped investors gauge policy intentions
  • World’s leading central-bank chiefs agree guidance is useful

The European Central Bank’s policy guidance will focus increasingly on interest rates as the end of quantitative easing nears, Executive Board member Peter Praet said.

“Policy rates will eventually regain their status as the main instrument of policy, and our forward guidance will revert to a singular approach,” Praet said in a speech in Frankfurt on Wednesday.

Words have become a key tool for the ECB to steer expectations about future policy moves and reinforce monetary support provided by asset purchases and record-low borrowing costs. With a pickup in consumer prices allowing for a gradual reduction of stimulus at the start of next year, the central bank’s guidance -- currently built on three pillars -- is bound to change.

“As we progress toward a sustained adjustment in the path of inflation and approach the time when net purchases will gradually come to an end, the residual monetary support needed to assist the economy in its transition to a new normal will increasingly come from forward guidance on our policy rates,” said Praet, who is also the ECB’s chief economist.

Speaking at the ECB on Tuesday, the world’s leading central bankers agreed that forward guidance has been an effective tool in the aftermath of the financial crisis, and will probably continue to be used.

It “succeeded contrary to everybody’s expectation at the time,” ECB President Mario Draghi said on a panel which also featured U.S. Federal Reserve Chair Janet Yellen, Bank of Japan Governor Haruhiko Kuroda and Bank of England Governor Mark Carney.

In a sign that changes won’t be too long in the making, the ECB’s Governing Council discussed adjusting is policy language at their October meeting. Three top officials recommended tying the overall level of monetary stimulus -- rather than just asset purchases -- to the inflation outlook, according to people familiar with the debate.

As far as Praet is concerned, investors have understood the connection between QE and price developments.

“Our forward guidance framework has left a clear imprint on the market’s ability to gauge our policy intentions,” he said. To ensure that this understanding will last, “we have to continue reflecting and having constructive debates on how to shape central-bank communication in the future.”

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