FRANKFURT (Reuters) - A recent string of dismal economic indicators justifies the European Central Bank’s move last month to provide more stimulus, and the bank can ease more if it needs to, Governing Council member Pierre Wunsch said.
While ultra-loose policy raises valid concerns about financial stability, the move was still necessary and gives incoming ECB boss Christine Lagarde time to prepare for a broader review of the bank’s strategy, Wunsch, Belgium’s central bank governor, told Reuters in an interview.
In the face of a lengthy slowdown, the ECB unveiled a fresh stimulus package last month even as a third of policymakers on the normally collegial Governing Council voiced opposition to fresh asset purchases, also known as quantitative easing.
“Knowing last year what we know about the economy today - that we’re not just experiencing a temporary soft patch - we would not have stopped quantitative easing (in 2018),” Wunsch said.
“If the incoming news is not very positive - and it hasn’t been positive since the decision - it reinforces the case for the decision,” Wunsch added.
One of the arguments against more stimulus was that easing financial conditions too far becomes counterproductive. Too low rates, for example, could reduce lending margins to a point where banks simply stop lending. Lending at very low rates could also inflate asset bubbles.
Wunsch, a relative newcomer to the 25-member Governing Council, accepted that these were legitimate concerns but said the ECB was far from the limits of stimulus.
“We are still quite far. Be it the reversal rate or financial stability, those are real concerns, but my take is that on both of them, we are quite far from binding trade-offs,” Wunsch added.
“Right now, we are far from our objective. We are not ‘close to but below 2%’,” Wunsch said, referring to the ECB’s inflation target.
Another argument against indefinite bond purchases was that it ties the hands of incoming ECB President Christine Lagarde, who takes over from Mario Draghi on Nov 1 and will have to own a scheme that may run for years to come.
“The issue would have come back again and again and again,” Wunsch said. “So I guess the decision would have been taken anyway, while now we have already a robust framework in place and the new president must not ask us to make decisions in the first meetings.”
Giving Lagarde time before the ECB needs to make big decisions also creates room for her to start a promised strategy review, which is likely to be a time-consuming exercise and may alter how the inflation target is interpreted and pursued.
A comprehensive package also signals to markets that the ECB is willing to act with all instruments, a vital message to markets that policymakers will not hesitate to act when required just because the bank was deeply in unconventional territory.
Commenting on the public spat between policymakers over the stimulus, Wunsch said that differences were actually smaller than they appear in the press but that it was still necessary to reconsider how policymakers communicate before meetings.
The problem is that some policymakers voice strong opinions ahead of meetings, drawing battle lines before the actual decisions are made, making it more difficult to have open-minded discussions behind closed doors, he said.
“When one starts communicating before a meeting, others feel (they are) being pushed into a corner and will want to express themselves,” Wunsch said. “So essentially you have a meeting before the meeting.”
Reporting by Balazs Koranyi; Editing by Hugh Lawson