As the European Central Bank prepares to wind down its ultra-accommodative stimulus, some of its top officials are telling investors not to fret.
“Too much emphasis has been put on the fears of policy normalization,” Governing Council member Ardo Hansson wrote in an article for the Eurofi conference in Tallinn this week. “One must understand that the process of normalization of policy stance is very gradual, and in fact it has been already started.”
The Estonian central banker’s comments — which acknowledge that the ECB’s bond purchases were slowed as of April this year — follow the council’s cue last week that a decision on the next step of the program is likely in October. While policy makers are considering various options on how a gradual winding-down process might look, some have expressed concern over the prospect that financial conditions will tighten and damage the economy.
Hansson argued that the main contributor to the ECB’s accommodative policy isn’t the monthly level of bond purchases — currently scheduled to run at 60 billion euros ($72 billion) until at least the end of this year — but rather the overall level of excess liquidity in the system.
After more than 2 trillion euros of asset purchases, combined with negative interest rates and free loans to banks, the bloc’s economy is proving robust yet inflation continues to fall short of the ECB’s goal. A surging euro has increased concerns that consumer-price pressures will be damped.
Executive Board member Sabine Lautenschlaeger, who has previously urged policy normalization as fast as possible, acknowledged the conundrum in the same Eurofi magazine but said that policy makers must get ready to act.
“Eventually, the party will get going, and we have to be prepared to take tough decisions in good time,” she said. “We also have to adapt our communications accordingly.”
Austrian Governor Ewald Nowotny took a similar stance, saying that a strategy to pare back stimulus must be “well designed, it has to be gradual, clear and consistent with our reaction function and our forward guidance.”
Nowotny also said that while early removal of stimulus could choke the recovery, waiting too long risked allowing imbalances to increase. That was echoed by Dutch central-bank Governor Klaas Knot, who said the “abundant availability” of liquidity has reduced market discipline.
“Prolonged monetary easing comes with diminishing returns, especially in a situation of very low interest rates,” he said. “The risk parameter relates to the unintended side-effects of unconventional monetary policy measures. The longer the ultra-loose monetary conditions persist, the larger this risk.”