World Economy

ECB's Praet: Brighter Prospects Signal Slower Pace of Asset Buys

ECB's Praet: Brighter Prospects Signal Slower Pace of Asset BuysECB's Praet: Brighter Prospects Signal Slower Pace of Asset Buys

A strong eurozone economy boosted policymakers' confidence that inflation would reach the target, opening up the scope for less bond-buying, European Central Bank executive board member Peter Praet said Monday.

On October 26, the ECB said the size of its monthly asset purchases will be halved to €30 billion ($34.76 billion) at the start of next year, but they will continue for nine months, RTE reported.

The bank opted the "lower for longer" style of tapering for a second time this year and many hope this would be the beginning of the end of ultra-easy monetary policy since the 2007-08 global financial crisis.

Praet, who is also the ECB chief economist, said there were three main considerations while deciding to reduce the size of the asset purchase program, or APP, namely pace, horizon and optionality. He was speaking at an ECB workshop on money markets and monetary policy in Frankfurt.

Regarding the pace, Praet said the brighter economic prospects have increased the ECB's confidence in the gradual convergence of inflation towards its target of "below, but close to 2%. This called for a lower pace of purchases," the policymaker said.

Yet, a substantial amount of monetary accommodation continues to be necessary to secure the gradual convergence of inflation towards the ECB's aim, Praet stressed. Monetary policy needs to be persistent and patient for underlying inflation pressures to gradually build up, he reiterated. "This speaks in favor of a sufficiently long horizon of additional net purchases," Praet said.

"The longer horizon also anchors short-term interest rate expectations for a longer period, thereby reinforcing the governing council's forward guidance on policy rates." Retaining the option to re-calibrate the APP if warranted is consistent with the forward guidance on the APP, Praet added.

Meanwhile, the eurozone private sector started the final quarter on a strong footing but the pace of expansion slowed since September, final data from IHS Markit showed Monday.

The composite output index fell to 56.0 in October from 56.7 in September. But the reading was slightly above the flash estimate of 55.9 and also the indicator signaled expansion in each of the past 52 months.

The October headline PMI reading matched the average seen in the third quarter and puts the region on course for another 0.6-0.7% expansion in the closing quarter of 2017, Chris Williamson, chief business economist at IHS Markit, said.

Add new comment

Read our comment policy before posting your viewpoints