ECB must end bond buying despite risks: board member

Frankfurt am Main

THE European Central Bank should put an end to its years-long stimulus effort for the eurozone despite a recent growth slowdown in the EU and rising economic risks, one of the institution's board member told AFP.

"It is time to gradually normalise monetary policy," Sabine Lautenschlaeger said.

She said that, while economic data showed "weaker-than-expected" conditions for the eurozone, "economic growth is overall within our projections". She added she was confident the Frankfurt-based ECB would reach its goal of inflation close to, but below 2 per cent.

Acceptable growth has convinced many ECB policymakers they can finally end the bank's mass purchases of government and corporate bonds, which served to pump cash through the eurozone's financial system and into the area's real economy, powering growth and boosting inflation.

The bond buying over the past three years has cost a total of 2.6 trillion euros (S$4.06 trillion).

Now that the ECB is prepared to end the scheme, fears have mounted in recent months over risks like a possible no-deal Brexit or trade conflict between Brussels and Washington.

But, Ms Lautenschlaeger said, "right now I don't see anything that could change this assessment" of ending bond buying before ECB governors meet on Dec 13.

Extending the purchasing programme going forward "would not bring significant additional benefits, but it would increase negative side effects," she said.

Once the ECB has stopped adding to its stock of bonds, it would reinvest the proceeds from the debt pile as they mature, making it a continued presence on bond markets for years to come.

When combined with other measures like historic low interest rates, long-term loans to banks and weekly deliveries of liquidity to financial institutions, "the reinvestments will act as a sufficient stimulus", Ms Lautenschlaeger predicted.

Looking ahead, the German central banker expects interest rates could rise "in the summer (mid-2019) or in the autumn, depending on the input we get from incoming data".

Long a voice calling to end bond-buying as soon as possible, Ms Lautenschlaeger added that in principle quantitative easing, or bond-buying, "should not be part of the normal policy toolbox".

"It should be a tool of last resort, to be used only when there is a clear risk of deflation."

At the same time as it weighs its exit from monetary stimulus, the ECB has a close eye on the eurozone's third economy, Italy.

A draft budget from Rome that would swell the country's deficit has been rejected by Brussels, with European officials saying it would not boost growth nor shrink that country's massive debt pile.

As vice-president of the Single Supervisory Mechanism (SSM) - the ECB's banking supervision arm - Ms Lautenschlaeger said she was keeping an eye on "changes and risks in the macroeconomic environment" for Italian lenders.

"Overall, the Italian banking system has become more resilient" since the SSM took up its work in 2014, she said.

But financial firms in Italy and elsewhere have a long way to go in slashing the amount of so-called non-performing loans (NPLs) - where the borrower has fallen behind on repayments - on their balance sheets, Ms Lautenschlaeger acknowledged.

NPLs "will keep us busy for the coming years", she said, even after five years of steady growth in the eurozone.

The ECB's tally of bad loans across the eurozone is 680 billion euros.

The eurozone consists of 19 of the current 28 EU nations. AFP