Praet’s Cautious Approach to ECB Bond Buying Attracts Doubts

LONDON (Capital Markets in Africa) – The European Central Bank’s ultra-cautious approach to removing stimulus triggered varying reactions, including a defense by chief economist Peter Praet and criticism from one of his former colleagues.

Addressing a workshop in Frankfurt on Monday, Praet argued that the Governing Council’s decision to keep quantitative easing open-ended was appropriate as inflation in the 19-nation euro region remains subdued. For Francesco Papadia, a former director general for market operations at the ECB, officials had a strong case to say that the active part of the program will be over by September.

Policy makers disagreed over whether to set an end-date for asset purchases at their October 26 meeting, when they prolonged QE through at least September at half the current monthly pace. Bundesbank President Jens Weidmann, a long-time critic of the plan, expressed his discontent within a day of the decision, while Executive Board member Benoit Coeure said he was hopeful that the latest extension would also be the last.

“Brighter economic prospects have increased our confidence in the gradual convergence of inflation toward our aim,” Praet said in remarks posted on the ECB’s website. “At the same time, a substantial amount of monetary accommodation continues to be necessary.”

In their discussions of how to adjust future bond buying, policy makers focused on three aspects, according to Praet — the monthly purchase pace, the duration of the program, and the possibility to recalibrate the rules if needed.

While “solid and broad-based” economic growth in the euro area allowed for a reduction of QE to 30 billion euros ($35 billion) starting in January, stubbornly low inflation warranted a commitment to keep accumulating debt, he said.

“We hardly have doubts about the direction we’re going in: that is to say a gradual increase in inflation toward the goal of 2 percent as growth strengthens,” Governing Council member Francois Villeroy de Galhau said in Paris. “But it’s true that we have questions about the rhythm of this progress.”

Papadia, who retired from the ECB in 2012, said he was surprised by the ECB’s wariness last month, arguing that a case could already be made to signal an end for QE.

“The reason why I thought they could have dared a little more is that the European economy is doing pretty well,” he told Francine Lacqua in an interview on Bloomberg TV. “At a certain point in time the central bank may be forced to do more more quickly if it hasn’t prepared enough ahead of time. Maybe if they could have done a little more, they could have done a little less going forward.”

Francesco Papadia, former ECB director general for market operations, examines the ECB’s latest rate decision.

Surprisingly Robust
Former ECB President Jean-Claude Trichet also remarked on the economy’s “surprisingly robust” performance, suggesting that the central bank’s course is adequate for the moment.

“We have a surprising absence of dynamism in inflation” but “we are much closer,” he said in an interview with Tom Keene on Bloomberg TV. “Until now, that decision is fully justified.”

With the economy set to expand at the fastest pace in a decade and companies hiring at the steepest rate in more than 10 years to keep up with surging orders, the situation may change quickly though.

Sentix, which measures investor confidence in the region, said on Monday that its gauge rose to the highest level since before the global financial crisis. Manfred Huebner, the company’s managing director, said he wonders whether the ECB, along with other central banks, is “not seriously going ‘behind the curve’.”

“Ultimately, it could be like inflation with ketchup from the bottle: you must knock on the bottle for a long time, until the ketchup comes,” he said. “But when it comes, then quite violently.”

Source: Bloomberg Business News