European Central Bank policymakers are preparing to dial back their extraordinary stimulus measures if the economy continues to improve, but that course of action is not yet certain, comments by three ECB rate setters and accounts of the latest meeting showed today.
This suggests policymakers are unlikely to make major changes when they meet again on June 8, opting instead for a small nod to the improved growth outlook.
Inflation and economic growth in the eurozone have rebounded, but the bloc's central bankers have yet to be convinced that this recovery would continue if their €2.3 trillion money printing programme and ultra-low rates are taken away.
Such caution underpinned the ECB's decision to keep its policy unchanged at its April meeting and was confirmed by comments by rate setters Benoit Coeure, Jens Weidmann and Vitas Vasiliauskas today.
This suggests policymakers are unlikely to make major changes when they meet again on June 8, opting instead for a small nod to the improved growth outlook.
Still, Coeure, an executive board member seen as a close ally of president Mario Draghi, said the ECB should not wait too long to take away its monetary support once it is satisfied that eurozone's inflation has reached its target of almost two per cent in a durable way.
"Too much gradualism in monetary policy bears the risk of larger market adjustments when the decision is eventually taken," Coeure said.
But he may face some resistance on a still overwhelmingly cautious Governing Council, where the governors of the eurozone's 19 national central banks sit alongside the six members of the executive board.
The ECB's decision-making body was still fretting in April that any hint at a tightening in the monetary stance could upset financial markets and undo some of the central bank's efforts, a point also publicly made by chief economist Peter Praet.
"After a long period of very accommodative monetary conditions, even small and incremental changes in communication could have strong signalling effects when interpreted as heralding a change in the monetary policy stance," the ECB said in the minutes of its April 27 policy meeting.
German central bank governor Jens Weidmann and Lithuanian governor Vitas Vasiliauskas said they would be in favour of winding down stimulus if inflation stabilised at the ECB's target of almost 2 percent.
Vasiliauskas cautioned bond purchases should be pared back gradually and before any interest rate hike is considered. Coeure struck a different note, however, saying the ECB could even raise rates before bond purchases end if it feels that its negative deposit rate, effectively a tax on banks' excess cash, was hurting lending. (Reuters)