With euro zone growth accelerating, the European Central Bank should reduce emphasis on the support provided by fresh asset purchases as its large balance sheet and low rates now provide the bulk of stimulus, two policymakers said on Friday.
The ECB decided on Thursday to halve bond purchases from the start of next year but extended the scheme by nine months, retaining the option for a further extension as growth and inflation still rely too much on central bank support.
But French Central Bank chief Francois Villeroy de Galhau and Bundesbank President Jens Weidmann both played down the relevance of new bond buys.
“Our non-standard monetary policy is … not simply about net monthly purchases, and we shouldn’t focus too much on them,” Villeroy said in a speech. “It is a group of instruments that we can play, by following a predictable sequence, as part of our gradual normalisation strategy.”
Weidmann, a long-time critic of the ECB’s bond purchases, went further.
“In my view a clear end of net purchases would have been warranted, especially because I, as you probably know, have taken a particularly critical view on government bond purchases in the euro zone,” he said in Paris.
“The main impact of our purchase programme is not so much in the monthly buys, but in the total volume of bonds already on our books,” said Weidmann, touted as a potential candidate to succeed ECB President Mario Draghi in two years.
The ECB has already purchased over 2 trillion euros of bonds and purchases could hit 2.6 trillion by the end of next year, a sizable stock the ECB promised to maintain for an extended period by reinvesting cash maturing from expiring issues.
Weidmann added that a move away from the bond purchases was also warranted given that growth was above trend and the gap between the economy’s output and potential was rapidly closing.
“According to our forecasts, the output gap will close next year, and in the short term, the economy could grow even faster than previously expected,” he said.
Indeed, a survey published by the ECB on Friday showed improved growth, inflation and employment expectations, partly underpinning the decision to curb stimulus.
The survey of professional forecasters, an important input in the ECB’s policy deliberations, now sees growth at 1.9 percent in 2018 and 1.7 percent in 2019, both 0.1 percentage points above a survey published three months ago.
But another ECB policymaker, Gaston Reinesch from Luxembourg, said the recovery was fragile, requiring caution in withdrawing stimulus.
“We have an economic situation that is improving, largely due – all the analyses show that – …to the monetary policy of the last years,” Reinesch told Radio 100.7. “That is still a fragile situation.”
Source: Reuters (Reporting by Leigh Thomas; Writing by Balazs Koranyi Editing by Jeremy Gaunt and John Stonestreet)