The divergence between the monetary policies of large economies is elevated but not unprecedented, European Central Bank executive board member Benoit Coeure said on Wednesday, adding that central bankers must be mindful of the side-effects of their policies.
“The global economy is currently characterized by an environment of diverging monetary policy cycles,” Coeure said in prepared remarks of a speech in Zurich, Yahoo News reported.
“While the US Federal Reserve (and to a lesser extent the Bank of England) has signaled its willingness to embark on steps towards monetary policy normalization, many central banks across the world are on an easing bias,” Coeure said, noting that over 20 central banks have eased policy so far this year.
This pattern is not unusual based on historical experience, Coeure noted, and added, “When considering interest rate level differentials between the United States and the euro area as a simple indicator of differences in global monetary policy cycles, it appears that current divergences are not out of line with what was happened in the past.”
Stimulus Measures
The ECB has taken the most aggressive stimulus measures this year, after it launched in March a 60 billion euros ($67.49 billion) a month asset-purchase program — mostly in government bonds — that is intended to last through September 2016. The euro’s exchange rate weakened sharply in the run-up to the bond-buying program and in its immediate aftermath. However, the euro has recovered ground in recent weeks on the back of some soft US economic figures.
Coeure said that while the exchange rate is important for economic growth and inflation, it isn’t a policy target for the ECB.
“Also, the exchange rate movements we have seen over the past few months are not unprecedented relative to the experiences of other major central banks with regards to announcements of quantitative easing policies,” he said.
In his speech, Coeure also called asset-price bubbles “a possible, but not an inevitable result of unconventional monetary policies.”
Although bubbles can provide a short-term lift to economic activity, they also have destabilizing effects and influence the distribution of wealth, he noted.
“Against this background, it would be wrong to treat bubbles as a welcome replacement therapy to a sustainable growth model,” he said.
Economic policies are key in this regard to create the conditions for lasting growth, he said, while supervisory and regulatory policies — known as macroprudential tools — should be used to address any financial stability risks.
ECB to Stay the Course
ING Bank economist Peter Vanden Houte summed it up this way: “Growth is clearly broadening across the eurozone. That said, the jury is still out whether eurozone growth has reached enough escape velocity to see a self-sustained recovery.”
First the good news.
The economic recovery looks real, albeit still quite modest. Spain has emerged as the 19-member euro bloc’s growth engine with annualized growth around 3.6% (0.9% quarterly), supporting the ECB’s contention that economic reforms and wage restraint are the best way to restore competitiveness and ensure growth.
The bloc’s second-biggest economy, France, recorded a robust expansion of 2.2% annualized, raising hopes that it will be more of a contributor to activity in the region. Italy exited stagnation with slightly better than expected growth.
Now the bad news.
Given the amount of stimulus hitting the eurozone, it should be doing better. In addition to the ECB’s asset purchase program – which has brought public and private borrowing costs lower – oil prices fell sharply in the early part of the year, a twin boost to households and businesses. And the euro fell sharply late last year and in early 2015, a boon to exporters. Against that backdrop, 1.6% growth looks lackluster.
And Germany’s growth rate came in below expectations. Greece’s economy contracted for a second-straight quarter, putting it back in recession and casting more clouds on its future in the euro.
