The European Central Bank is monitoring the impact of its monetary stimulus on financial stability, though governments and regulators must also play their part in preventing imbalances, two of the institution’s policy makers said.
The ECB’s framework incorporates “important safeguards to prevent an overly narrow and zealous interpretation of price stability from becoming a source of financial instability,” Executive Board member Peter Praet said in the text of a speech in Beijing on Wednesday. The central bank will “exercise caution” with the instruments it chooses, Governing Council member Francois Villeroy de Galhau said in Frankfurt, Bloomberg reported.
The ECB will set monetary policy on Sept. 8, when it must assess the impact on the eurozone’s gradual recovery of the UK’s decision to quit the European Union. The central bank’s current strategy of negative interest rates and large-scale asset purchases has drawn criticism that it’s distorting markets, with Deutsche Bank AG Chief Executive Officer John Cryan among those calling on policy makers to change course.
Praet pushed back against the charge that the ECB’s ultra-accommodative stance could allow the build-up of risks such as asset-price bubbles, saying it effectively leans against the wind.
Bottom of Form
“The representation of monetary policy as focusing on a short policy horizon and with little regard for broader financial cycles does not do justice to the strategies that many central banks follow today, and certainly not to the strategy of the ECB,” Praet said.
“The ECB follows a flexible medium-term horizon and, as part of its two-pillar strategy, closely monitors the dynamics in money and credit which may act as signals for the build-up of financial imbalances.”
Praet and Villeroy both said they believe the central bank’s current stimulus is warranted, and urged other actors to take suitable measures to support monetary policy while safeguarding financial stability.
Figures published Wednesday showed eurozone inflation was unchanged at 0.2% in August, and unemployment held at 10.1% in July. Both numbers were weaker than economists’ estimates.
“Monetary policy of course plays an important role, because it secures the monetary stability necessary for economic growth,” Villeroy said. “But monetary policy alone is not enough.”
Stick to Current Policy
The ECB should stick to its current monetary policy stance, the French central bank chief said on Wednesday, reinforcing views the bank would chart a steady course when it meets next week, Reuters reported.
The ECB has provided extraordinary stimulus for years to boost inflation but has missed its inflation target in over three years. It now faces calls for yet more policy easing, but already relies heavily on untested unconventional tools, such as subzero rates and large-scale asset buys.
Speaking to a business forum in Frankfurt, Francois Villeroy de Galhau said the ECB needed to follow a cautious stance and that instruments such as helicopter money—direct cash from central banks to consumers—were not appropriate.
"Negative interest rates are useful but they are just one among many instruments and have their limits," Villeroy, who also sits on the ECB's rate-setting Governing Council, said. "This is why we have to stick to the current monetary policy. And yes, we're doing so sustainably."
Fifth Year of Misses
Praet will present fresh inflation and GDP forecasts at the Sept. 8 meeting. Most economists expect only small changes, including slightly slower growth, primarily due to the impact of Britain's expected departure from the European Union.
The forecasts may present a dilemma for policymakers as they will likely show inflation still below target in 2018, which would be its fifth year of misses and would threaten the credibility of such targets.
Recent research published by the ECB has indeed suggested that long-term expectations may have started to drift lower but such a conclusion has not been widely accepted by the bank.
Meanwhile, Germany's annual inflation has slowed unexpectedly, adding to the pressure for more policy easing from the ECB. And the economic sentiment in the eurozone has slipped to its gloomiest level since March, a report said.
