The European Central Bank’s latest extension of quantitative easing contains “a form of warning” that unprecedented monetary stimulus is not going to last forever, Executive Board member Benoit Coeure said on Friday.
“Sources of growth that aren’t dependent on monetary policy need to be found. Long-term rates will rise,” Coeure said in in an interview on Europe 1 radio. “Economic players need to be ready, notably governments that have benefited a lot from falling rates.”
The ECB decided on Thursday to prolong asset purchases through December 2017, while lowering the monthly amount to 60 billion euros ($64 billion) from 80 billion euros as of April. An alternative option the Governing Council considered was extending the program for six months at the current pace.
The reduction is a sign of the ECB’s confidence in the economic recovery and the ability of inflation to return to the central bank’s goal of just under 2 percent goal, Coeure said.
“The euro zone is recovering, it’s doing better, but it still needs its medicine of accommodative monetary policy, low rates,” Coeure said. “So we’re lowering the dosage because things are getting better. But we’re lengthening the prescription.”
ECB President Mario Draghi struck a more downbeat tone on Thursday, when he cited weak underlying price pressures, political uncertainties and inadequate government reforms as reasons for expanding QE to at least 2.3 trillion euros.
“They need to communicate the message that: you guys need to get your house in order as the QE time horizon is definite,” said Nick Kounis, head of macro research at ABN Amro NV in Amsterdam. “Some governments can get used to the comfort blanket of the QE and the ECB are concerned about what happens once that blanket is removed.”