European Central Bank policy makers aren’t showing much of a rush to start tweaking their monetary policy as they count the days until their summer holidays.
The Governing Council is likely to decide on the next change in its stimulus settings in the fall, according to comments on Saturday from Francois Villeroy de Galhau, the Bank of France governor. ECB Chief Economist Peter Praet, speaking in a newspaper interview released the same day, insisted that “we still need a long period of accommodative policy.”
With the next policy update scheduled for July 20, and a break from all meetings for more than a month after Aug. 2, the tone of the comments suggest officials are practicing the patience that ECB President Mario Draghi called for at the June decision. He said then that the euro zone economy still needed “very substantial” stimulus.
“What we have to do, and what we started to do, is to adapt the intensity of this accommodative monetary policy to the progress toward our inflation target and toward economic recovery,” Villeroy de Galhau said in a Bloomberg Television interview. “In the future, and this will be our decision next fall, we will go on adapting the intensity of this monetary policy.”
Villeroy’s remarks add to signs that the ECB intends to pare back stimulus in a way that doesn’t tighten financial conditions. Both the French governor and Executive Board member Benoit Coeure have suggested in recent days that the Governing Council’s action last December could serve as a blueprint for adjusting policy. At the time, they announced the monthly level of bond buying would be cut to 60 billion euros ($68 billion) from 80 billion euros starting in April, arguing the reduction was reflective of a lower risk of deflation.
“We scaled back our asset purchases without undermining the support given to the economy,” Coeure said in an interview published Friday. “If needed, the Governing Council will continue to adjust its instruments both qualitatively and quantitatively.”
Both those officials also stressed the importance of transparently communicating changes to policy, with Coeure warning that otherwise there could be more abrupt adjustments in the markets when decisions are actually taken. Villeroy argued the ECB has been “extremely clear about the visibility, predictability of our monetary strategy.”
Not all of their colleagues on the Governing Council agree that gradualism is the best approach. Dutch Governor Klaas Knot warned on Friday evening that the central bank is “very close to the point” of keeping quantitative easing for too long, noting that the global financial crisis was partly caused by too much money being pumped into the system. In a less urgent tone, his German counterpart Jens Weidmann said last week that the perspective of monetary-policy normalization was opening as the economy continues to recover.
Still, consumer-price growth — currently at 1.3 percent — remains a long way from the ECB’s goal, and isn’t forecast to return toward it until at least late 2019. Subdued inflation pressures are a key concern for Praet, who pieces together the Executive Board’s policy proposals and presents them at each Governing Council meeting, and has been a vocal advocate of patience.
That might augur a quiet summer for the ECB as officials mull their next steps. Key to the Governing Council’s eventual decision on stimulus is how the economy develops, and data due this week is likely to underline the region’s recent upturn. Industrial production is forecast to have risen in May by the most since November after beating expectations in three of its four largest economies.
Data on Monday showed Dutch and Finnish production accelerated in May, and German exports picking up.
“We should be patient and persistent regarding our monetary policy,” said Praet in his interview with Belgian newspaper De Standaard. “Inflation is picking up, but that is a process that is a long way from completion.”
Villeroy de Galhau echoed that in his interview with Bloomberg Television. What matters most is the real economy, and the ECB should not let itself be distracted by political pressures or investor impatience, he said.
“The most influential members of the Governing Council are pragmatists,” he said. “I clearly am a pragmatist.”