BRUSSELS/LONDON (Reuters) - The European Central Bank will get ready to make large-scale asset purchases but is still a long way off embarking on such a plan and will first assess whether the inflation outlook has changed, ECB policymakers said.
Faced with inflation rates running far below its target, the ECB last week opened the door to turning on its money-printing presses with so-called “quantitative easing” (QE) to boost the euro zone economy.
But senior ECB policymakers stressed on Monday that they saw no immediate need for action, while there was a long way to go before they followed other major central banks like the U.S. Federal Reserve and embarked on QE.
The ECB still needs to navigate its way through an array of issues on the design of any QE programme, and work fast to develop the market for asset-backed securities (ABS) should it decide to buy them under the plan.
Yves Mersch, a member of the ECB’s six-member Executive Board, said financial markets should not jump the gun and expect immediate action, stressing that the ECB still had room to cut interest rates again.
“From the theoretical agreement to the implementation of the operations is still a long way,” he added in London.
Mersch’s comments may temper market expectations for the ECB to embark on QE. A Reuters poll of 21 euro money market traders gave a median 40 percent chance of the ECB starting its own QE programme.
In Brussels, ECB Vice President Vitor Constancio said low inflation - running at just 0.5 percent - put the euro zone in “a situation of great concern”.
“Any shock could possibly bring inflation to negative territory, as is already the case in a few member states,” he said. “Negative inflation would be a very serious matter.”
But he added that the ECB must examine whether the medium-term inflation outlook had changed from the scenario it set out last month before deciding whether to take fresh policy action.
Forecasts from ECB staff in March pointed to inflation rising to 1.5 percent in 2016, and hitting 1.7 percent in the final quarter of 2016 - barely meeting the ECB’s target of inflation of just below 2 percent over the medium term.
“We need to see what happens to inflation in April. It’s possible we will see an uptick in inflation rates,” Constancio said.
Constancio stressed that taking extraordinary policy measures “should not be decided lightly”, and cautioned that press reports suggesting the ECB could buy a trillion euros of assets was premature.
“Experts and working groups are working on many hypotheses and they must be free to do so, but I advise that no one takes into consideration technical studies that may be going on with many different hypotheses. Nothing has been decided,” he said.
The EU’s statistics office, Eurostat, will release a flash reading for April inflation on April 30.
However, the numbers could be skewed by seasonal effects such as a late Easter, meaning the ECB may have to wait until May or June to get a clearer view of the inflation picture.
Mersch detailed a list of issues the ECB would have to iron out before it launched into any QE programme.
“The specificities relate to the existence and eligibility of different asset classes, both private sector and public sector,” he said. “We have also looked into the legal side... we have to operate in relation to our mandate.”
In Vienna, Austrian central bank chief Ewald Nowotny told reporters the ECB was watching developments closely as it weighed whether further steps including unconventional measures might be warranted.
“It does not mean that steps are to be taken immediately, rather than one prepares for all eventualities,” he said.
Nowotny said his preference was to strengthen the ABS market in Europe, which he added could directly boost prospects for financing small and mid-sized enterprises (SMEs) while having a positive monetary policy effect.
Securitisation was tarnished when debt based on sub-prime U.S. mortgages became untradeable in 2007, triggering the global financial crisis.
Seeking to rehabilitate the sector with a view to boosting lending to SMEs, Mersch put forward a plan for central bank ABS eligibility criteria, which he said could form a useful starting point for identifying ‘qualified’ ABSs.
“We must act fast and in a manner that is sensitive to our own European reality,” he said.
With its main interest rate at a record low of 0.25 percent, the ECB is being forced to look at unconventional policy measures to address the low inflation in the euro zone.
Nowotny said a further rate cut was not ruled out but questioned “if a rate cut now really has an impact or perhaps whether other measures perhaps are more effective”.
Highlighting the ECB hawks’ resistance to over-extending monetary policy, Bundesbank chief Jens Weidmann said in Amsterdam: “Overburdening monetary policy is of course anathema to the Bundesbank.”
Dutch central bank chief Klaas Knot, speaking at the same event as Weidmann, took a similar line: “Monetary policy cannot solve the problems of EMU,” Knot said. “It can only buy time that should be used effectively.”
Writing by Paul Carrel; Editing by Toby Chopra