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ECB should stick to its clearly laid out policy path - Smets
March 27, 2017 / 1:57 PM / 8 months ago

ECB should stick to its clearly laid out policy path - Smets

BRUSSELS (Reuters) - The European Central Bank should stick to its policy guidance even as the economy gains strength, Governing Council member Jan Smets said, dismissing comments by a “minority” that the bank’s guidance on rates and asset buys is up for discussion.

Belgian central bank governor Jan Smets poses ahead of an interview with Reuters in Brussels, Belgium, May 11, 2016. REUTERS/Francois Lenoir

Once the recent rise in inflation becomes sustainable, the ECB could then look and learn from the experiences of the U.S. Federal Reserve in how to normalise policy and communicate the end of stimulus, Smets, also head of the Belgian central bank, told Reuters in an interview.

“Our forward guidance is clear and we have to stick to that,” Smets said. “If other views have been expressed on this issue, they are reflecting a minority position. Our decision is clear and I would like to stick to that steady hand approach.”

“We have made clear what we will do until the end of the year,” Smets added. “‘Steady hand’ means we expect the monetary policy stance to remain as we decided, including interest rates, the purchase programme and the forward guidance.”

Critics within the ECB say that rising inflation and firming economic growth warrant fresh discussions and possibly the beginning of the process of exiting its policy of extraordinary stimulus.

With its interest rates in negative territory and its asset-buying programme set to hit 2.3 trillion euros by the end of the year, the ECB has unleashed unprecedented firepower to revive the economy, irking conservative member states - particularly Germany, the euro zone’s biggest economy and home to the ECB.

Pushing back against these critics, Smets said the recovery alone was not reason enough for the ECB to reduce its monetary largesse, particularly since inflation is not recovering and wage growth is still weak.

“Even if the real economy is going better and the probability of a very adverse scenario – which would require more monetary accommodation – has come down, a sustainable rebound in inflation has not been achieved yet,” Smets said.


Austrian central bank chief Ewald Nowotny ruffled markets this month when he said the ECB will decide only later whether to raise rates before or after stopping bond purchases, putting in doubt the ECB’s own guidance that it will revisit rates only well after ending its bond buying.

Markets immediately started to price in a rate hike for early next year, with investors anticipating a quicker policy normalisation from the ECB.

Fuelling the speculation, the ECB had tweaked the language of its own guidance, removing a reference to being ready to act with all instruments. That change was intended at signalling its relative comfort with the outlook, but many interpreted it as laying the groundwork for exiting its current ultra-loose policy.

“I don’t see any reason to revisit what we have decided,” Smets said. “Our assessment was very thorough and complete. I don’t see any development which would put our assessment in doubt.”

Once the ECB is ready to discuss exiting its current policy, the experience of the Fed, which first stopped its own asset buying before raising interest rates, may be relevant, Smets said.

“The Fed experience is relevant because it’s interesting to see how they manage their exit from purchases and a large balance sheet, while starting to normalise interest rates,” Smets said. “We can learn from that and not only from an operational perspective but also regarding communication.”

Critics of copying the Fed’s approach argue that the ECB cut rates into negative territory, something the U.S. central bank never did, so undoing its punitive measures could come sooner.

Still, in a hopeful sign for the bloc, growth has been stronger than expected in the first quarter with both surveys and hard data showing strength in industry, consumption and employment, pointing to the euro zone’s best run since the global financial crisis.

Reporting by Balazs Koranyi; Editing by Hugh Lawson

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