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ECB needs to move very gradually in normalisation

Frankfurt

EUROZONE inflation will eventually pick up as the economy grows, but the European Central Bank (ECB) needs to remain patient and remove its stimulus only very gradually, ECB policymaker Ardo Hansson said on Wednesday.

The ECB has kept interest rates extremely low and been printing money and buying bonds with it for three years to pump cash into the financial system and help revive inflation. But policymakers are now debating how to claw back that support and whether to wind down its lavish bond purchases later this year.

"Some people say err on the side of caution; let's wait and wait," Mr Hansson said in a lecture at the SAFE Institute in Frankfurt. "But the risk there is that you wait too long and you're forced to do a bit of catch up." "All these changes have to be very gradual and the ECB has a very strong track record in doing things in a gradual and predictable fashion," he said.

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On Tuesday, ECB policymaker Ewald Nowotny pushed up the euro and eurozone bond yields when he told Reuters in an interview that he would have "no problem" lifting the bank's deposit rate to -0.2 per cent from -0.4 per cent as a first move towards normalising its monetary policy.

Markets now expect the ECB to stop buying bonds by the end of the year, then raise interest rates for the first time since 2011 sometime in the second quarter of next year, even as inflation remains short of its target of almost 2 per cent.

"The recent low inflation in the euro area has been the result of a combination of factors," Mr Hansson said in a lecture. "Most of them are of a temporary nature and their impact will weaken over time.

"Therefore, we need to be more patient in achieving our price stability goal," he said, referring to the ECB's process of removing unconventional tools and normalising policy. REUTERS

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