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Frankfurt - Not all European Central Bank officials agree that more stimulus is needed.
Less than a week after President Mario Draghi primed investors for an expansion of quantitative easing and the possibility of another cut in the deposit rate, Governing Council members are publicly revealing the arguments that will define their December 3 decision-making meeting.
A rift has already emerged, with Peter Praet, the ECB’s chief economist, telling an audience in Riga on Wednesday that the bank has a duty to use all instruments available, and Executive Board member Benoit Coeure saying in Mexico on Tuesday that a slower-than-anticipated return of inflation toward the ECB’s 2 percent goal may warrant additional stimulus.
Taking up the other side of the debate are Ardo Hansson, a council member from Estonia, and his Latvian counterpart, who said they see no need to rush action.
With the eurozone’s fragile economic recovery at risk of being derailed and an emerging-market slowdown dragging on global trade, the focus is now on ECB Vice President Vitor Constancio, who took the stage at 14:45, at a conference on financial stability.
Rich discussion
“We have a very rich discussions in the Governing Council, and as I always say high quality, there are different views but the analysis is always rich and respectful,” Praet said. Officials are “not only willing, but also able to act, we have always demonstrated this capacity to act collectively.”
Praet’s comment that downside risks have “clearly increased” is a reflection of the ECB’s struggle to nurture the recovery and revive inflation. Draghi all but promised to ease policy at the December meeting by committing to be “vigilant,” invoking his predecessor Jean-Claude Trichet’s preferred signal for imminent action.
“Of course, there is six weeks until that time, if something very fundamentally changes, I can reevaluate, but now I don’t see any grave need to take such a step,” Hansson said.
“The external environment has become more fragile and that’s clearly on the table. But we see also in the domestic eurozone economy quite a lot of resilience, we see growth continuing near projected levels.”
More data
The ECB predicted in September that the 19-nation economy would expand 1.4% this year, 1.7% in 2016 and 1.8% in 2017. Inflation was seen at 0.1%, 1.1% and 1.7%, respectively.
Coeure signaled that the cue for more stimulus may come from any downward revision to those forecasts, while council member Ignazio Visco of Italy said policy makers are determined to use all available instruments to achieve a proper monetary expansion.
“If we see a risk that inflation would go back to 2% much less quickly or in a much more sluggish way than previously expected, that would imply that de facto real interest rates at this level would be higher,” Coeure said. Adjusting the deposit rate is “an open discussion, but it’s a discussion that has started,” he said.
Policy ramifications
Sweden’s Riksbank has already taken out insurance against more ECB stimulus. It expanded its bond-purchase plan for a fourth time since February on Wednesday, while keeping the benchmark repo rate at minus 0.35%.
As ECB policy makers weigh some of their last remaining tools, they’ve also stepped up their demands on European governments to do their share to rekindle growth.
“What we see is we are strong in fighting inflation, we are weak in fighting deflation,” ECB Governing Council member Ewald Nowotny said in a lecture at Zurich university on Tuesday. “That is exactly the situation we’re in now. And that’s why now we have to discuss the limits of monetary policy.”
Officials are set to receive a raft of data before they have to make their decision. Consumer prices probably stagnated in October after falling 0.1% in September. Eurostat, the European Union’s statistics office in Luxembourg, will publish the report on Friday, along with unemployment data for September.
While QE seems to have contributed to a turnaround in lending, it’s premature to assess its impact, Ilmars Rimsevics, a Governing Council member from Latvia, told reporters in Riga on Wednesday.
“We still need to receive more data,” he said. “These are the first small green shoots, I think we need another six months to evaluate the situation.”
