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ECB should adjust guidance as risks to growth more balanced - Mersch
May 8, 2017 / 6:01 AM / 7 months ago

ECB should adjust guidance as risks to growth more balanced - Mersch

FRANKFURT (Reuters) - The European Central Bank is close to replacing its negative view on whether the euro zone economy will reach growth targets with a neutral one, and should adjust its policy guidance accordingly, board member Yves Mersch said on Monday.

Yves Mersch at the headquarters of the European Central Bank (ECB) in Frankfurt, January 13, 2014. REUTERS/Ralph Orlowski

As growth picks up and labour markets tighten, inflation should also rebound, eventually leading to a discussion about normalising monetary policy, Mersch said in Tokyo.

Nevertheless, there should be no deviation from the super-easy policy stance the bank has already agreed on, he added.

Hoping to revive inflation and growth after fighting off the threat of deflation, the ECB has set base interest rates below zero and is buying 60 billion euros worth of bonds each month - a policy approach it has said it will maintain at least until the end of this year.

But growth is on its best run in a decade and inflation is rising, leading critics - particularly in Germany, the euro zone’s biggest economy - to demand for an exit from stimulus.

“The recovery in the euro area is gaining more and more traction. The confirmation of a broadly balanced risk outlook for growth is within reach,” Mersch said. “Our forward guidance needs to be aligned with an evolving assessment to underpin both the consistency and credibility of our communication.”

The ECB now guides for rates to stay at current or lower levels well beyond the end of its asset purchases. It also stipulates that asset buys could be increased if the outlook worsens.

While the ECB is fully expected to declare the growth outlook balanced at its June meeting, dropping the reference to further rate cuts or more asset purchases - its easing bias - is not seen as a done deal as underlying inflation is still weak.

Mersch nevertheless argued that higher growth and falling unemployment should support inflation and there are already signs of early inflationary pressures stemming from higher producer prices.

“If the euro area economy recovers and inflation proceeds further on its path towards the ECB’s inflation aim in a sustained manner, a discussion on policy normalisation becomes warranted in the future,” he added.

The ECB was for the time being convinced of the need to stick with its accommodative monetary policy stance without deviation from announced measures.

But it nevertheless needed to examine how its policy measures functioned under more balanced economic prospects, as opposed to the environment of deflationary risk that prevailed at the time of their introduction, Mersch said.

Reporting by Balazs Koranyi and Leika Kihara; editing by John Stonestreet

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