As Bond Buying Continues, ECB Rate Pledge Could Be German Solace

A colleague of Mario Draghi – Yves Mersch, has a suggestion if Draghi is willing to send a signal that the European Central Bank’s stimulus drive won’t last much longer.

According to Mersch, who sits with President Draghi on the Executive Board that proposes and implements monetary policy, the time is ripe for the ECB to review its insistence that it could cut interest rates further. The central bank’s credibility is at stake, he says.

The argument that the moment has come to consider sending a message that monetary stimulus is approaching its end game is being put forward for the second time by Mersch and he is the second person on the six-member board to do so — after Sabine Lautenschlaeger last month.

While the comments highlight the difficulty in winding down a policy that covers 19 very different national economies, it might mean investors scrutinize every remark to see if a tipping point has been reached.

Designed to maintain downward pressure on market borrowing costs by minimizing uncertainty over the outlook for monetary policy and a key part of the ECB’s forward guidance is the argument that rates will stay at “present or lower levels” for an extended period and dates back to 2013, Draghi promises.

Further cuts are no longer a credible option as the impact of negative rates more unpredictable the deeper they go and with the economy recovering, argues Mersch.

“How much longer can we continue to talk about “even lower rates” as being a monetary policy option? Considering the importance of credibility for a central bank, as mentioned, there should be no delay in making the necessary gradual adjustments to our communication.”

The populist parties in Germany are tapping into long-held resentment among savers as the country is warming up for an election and this view is likely to be embraced in Germany. Lawmakers from her coalition expected a signal that the end to ultra-loose policy is on its way when Draghi traveled to Berlin to meet Chancellor Angela Merkel on Thursday and Bundesbank President Jens Weidmann has railed against too much QE.

“A first step could be a reversal of the negative interest rates that particularly affect pension funds, insurance plans and companies,” Antje Tillmann, Merkel’s coalition spokeswoman in the German parliament’s finance committee, said before the meeting. Details of what Merkel and Draghi discussed were not revealed by the German government.

The ECB’s bond-buying program is scheduled to run until at least the end of this year and total a minimum of 2.28 trillion euros ($2.4 trillion) and focusing on interest rates might have the advantage of diverting attention from how to unwind the program.

Mersch sees no room for further reductions given the uncertainties facing the region and the pace of monthly purchases will slow in April. two potential rupture points are the weakness of Italian banks and a flare-up of the Greek crisis. After a reining-in of central-bank independence key elements of France’s Marine Le Pen presidential campaign and after she decided to make a euro exit, the bond spreads have widened.

It is “an art” to prepare and plan an exit from extraordinary monetary policy even as German Finance Minister Wolfgang Schaeuble conceded on Wednesday.

(Adapted from Bloomberg)

Categories: Economy & Finance

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