European Central Bank interest rates may be close to bottoming out but it is still premature to talk about reducing economic stimulus given the risk of acting too early, ECB executive board member Yves Mersch said on Thursday.
The bloc’s recovery is fragile, and the rise in inflation may not be sustainable, so any reversal needs to be very gradual and careful, Mr Mersch told a conference.
The cautious tone from one of the few hawks on the ECB’s governing council suggests that any monetary tightening is still some time away, and the bank remains on track when it meets next month to extend its asset-buying scheme beyond its tentative end next March.
"If you look at the US Federal Reserve, they were very careful in normalising policy," Mr Mersch said. "I'm not off the mark if I say that the ECB will also do the same, acting with necessary caution.
“I believe that [talking about exiting stimulus] is probably still premature given the fragility of the European growth path.”
Giving a nod to the bond market selloff since the US presidential election, Mr Mersch added that higher yields would also affect the ECB’s assessment.
Excessive expectations
Hoping to cool expectations about the bank’s December meeting, Mr Mersch said the ECB was engaged in deep policy discussions which could “easily extend” beyond a single meeting.
“And that is why I don’t want to fan excessive expectations for our next meeting. And we must not forget that one can do a great deal of damage by acting prematurely.”
Hoping to prop up inflation and growth, the ECB has cut rates into negative territory, regularly gives banks free loans, and buys €80 billion worth of assets each month, all in the hope of cutting borrowing costs and stimulating spending.
Inflation, below the bank’s 2 per cent target for over three years, is now on the way up, probably exceeding 1 per cent early next year, a relief for the ECB but also an argument for the hawks on its governing council to reduce stimulus.
Policy stance
Mr Mersch, considered a hawk, said the bank must roll back its aggressive stimulus measures “as soon as possible”, but admitted that given the large volume of asset buys, withdrawal will probably take time.
He also said that given the fragility of the bloc’s recovery, the ECB’s current policy stance was appropriate.
"Our measures ... were introduced as temporary measures and must be rolled back as soon as possible. In light of the volume of the purchase programme, that will take some time, but a prolonged deployment of our asset purchases would, for example, create wrong incentives in the financing of states." - Reuters
