October 11, 2017 / 9:33 PM / in a year

UPDATE 1-ECB's Praet makes case for longer stimulus extension

(Adds comments from Praet, background)

NEW YORK, Oct 11 (Reuters) - A longer extension of the European Central Bank’s bond-buying programme may be more beneficial during periods of calm, the ECB’s chief economist, Peter Praet, said on Wednesday, just weeks before the bank decides whether to extend stimulus.

“In more normal market conditions ... investors may become ‘more patient’, or, in other words, better able to evaluate the stimulus that can be expected to come from a purchase plan that is to be executed over a more extended time interval,” Praet said in a speech in New York, which reiterated comments he made recently.

Although Praet stopped short of endorsing a longer extension of asset buys at lower volumes, he noted that the euro zone was on its best run in years, enjoying a solid, broad-based, resilient recovery.

With the ECB’s 2.3 trillion euro bond purchase scheme due to expire at the end of the year, the choice on Oct. 26, when the ECB holds its next policy meeting, is likely to be between a small extension with a moderate cut in asset purchases or a bigger extension but at even lower monthly volumes.

The core of the ECB’s dilemma is that while economic growth is solid, helped by its stimulus, inflation remains anemic, likely undershooting the central bank’s almost 2 percent target for years to come.

“While the euro area recovery remains solid, broad-based and resilient, the economy has yet to make sufficient progress towards a sustained adjustment in the path of inflation to levels that are consistent with the Governing Council’s aim,” Praet said.

He added that although there have been some encouraging signs on inflation, they remained timid, so stimulus is still required.

Praet noted that reinvestments from maturing debt will also provide accommodation, and the ECB is likely to release more data on its reinvestments in the near future.

Policy hawks argue that the ECB has done what it could to raise inflation so it should now step back and just give it time. Doves caution that a hasty exit could trigger market turbulence that unwinds the very stimulus the bank had hoped to achieve.

But while policymakers disagree over the bank’s next move, most agree that some reduction is stimulus is appropriate, even if easy monetary policy is likely to remain for years to come. (Reporting by Balazs Koranyi; Editing by Francesco Canepa and Leslie Adler)

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