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ECB officials pave way for gradual policy tightening

Reuters  |  FRANKFURT 

By Francesco Canepa and Balazs Koranyi

FRANKFURT (Reuters) - Six European Central policymakers prepared the ground on Monday for a gradual roll-back of the ECB's aggressive monetary stimulus, in light of stronger economic growth in the euro zone.

After 2-1/2 years of unprecedented money printing, the is preparing to dial back its 2.3 trillion euros bond-buying programme, which has helped boost growth in the euro zone but is also blamed for creating real estate and financial bubbles.

board directors Sabine Lautenschlaeger, Yves Mersch and Benoit Coeure, and the central governors of the Netherlands, Austria and Estonia all discussed the prospect on Monday of a gradual reduction in support.

"The economy in the euro area is doing better and the conditions are in place for inflation to pick up and move steadily towards our goal," Lautenschlaeger said in a written contribution to the Eurofi financial forum, due to take place in Tallinn on Sept. 13-15.

"We have to be prepared to take tough decisions in good time. We also have to adapt our communications accordingly," said Lautenschlaeger, considered one of the top hawks on the rate setting Governing Council.

Euro zone price growth has stabilised just above 1 percent, stemming fears of deflation, or a sustained drop in prices. Yet it is still far from the ECB's target of almost 2 percent.

Sources have told rate-setters agreed last week to start reducing the bond purchases, with a decision likely at their next meeting on Oct. 26.

Coeure, however, cautioned that ECB's was set to remain easy for a long time and played down a drag on inflation from a recent rally in the euro.

"Compared with past demand shocks, will remain more accommodative for longer, thereby likely muting further the pass-through of any growth-driven exchange rate appreciation," told a conference in Frankfurt.

"And with the current recovery in the euro area being largely driven by domestic demand, euro strength may also have less of an impact on growth than, for example, after the Great Financial Crisis," he added.


Rate setters have refrained from changing thus far largely out of fear that this would push up the euro and borrowing costs in the bloc, undoing some of the ECB's stimulus efforts.

Seeking to downplay these fears, Mersch, Estonian governor Ardo Hansson and his Austrian colleague Ewald Nowotny said any reduction would be gradual.

"Too much emphasis has been put on the fears of normalisation," Hansson said in his message to Eurofi.

"The process of normalisation of stance is very gradual and in fact, it has been already started."

Dutch central governor Klaas Knot emphasised in his own contribution the risk that easy cash would fuel bubbles and reckless behaviour on financial markets.

The targets inflation at almost 2 percent over the 'medium term', an undefined concept that is influenced by the size of any inflation shock.

The has undershot its price growth target for four and a half years and will not see inflation back towards 2 percent before 2020, its new projections from last week showed.

(Reporting by Balazs Koranyi; Editing by Toby Chopra)

(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)

First Published: Mon, September 11 2017. 19:23 IST