The European Central Bank could end its bond purchases this year if the economic upswing continues, taking another step on a long road to unwinding unconventional stimulus, Bundesbank president Jens Weidmann said on Tuesday.
A persistent critic of the ECB’s lavish bond purchase scheme, Mr Weidmann argued that broad-based and rapid growth should ensure that inflation rises back to target and policy will remain loose for a long time even when quantitative easing is finally ended.
The euro zone economy has been on its best run in a decade due in great part to ECB efforts to keep borrowing conditions at record lows to spur borrowing, spending and investment all in the hope of generating inflation.
Indeed, fresh lending data published on Tuesday show both corporate and household lending growth at a post crisis high, suggesting that the ECB’s efforts are paying off, even if slower than earlier expected.
"If the upswing continues and prices rise accordingly, in my view, there is no reason why the Governing Council should not end the net purchases of securities this year," said Mr Weidmann, who is expected to be Germany's candidate to take over from ECB president Mario Draghi when his term expires late next year.1
He said the euro zone’s strong economic performance confirmed the council’s conviction that inflation will approach its target of close to but below 2 per cent.
“I believe it is important to gradually and dependably reduce the degree of monetary policy accommodation when the outlook for price developments in the euro area permits us to do so,” he said.
Investors now expect the ECB to end its €2.55 trillion bond purchase programme by the close of the year, convinced that inflation will continue to rise, even if only slowly.
Still, corporate lending growth at 3.4 per cent, the highest rate since mid-2009, is less than half of its pre-crisis rate, suggesting that the euro zone recovery has more room to run, particularly since labour market slack remains sizable.
“One thing seems clear to me: monetary normalisation in the euro area will take a long time,” Mr Weidmann added. “Monetary policy will remain very expansive even after the end of net bond purchases.”
While the ECB has signalled concern over the volatility of the euro against the dollar and its potentially negative impact on inflation, Mr Weidmann noted that the effect of exchange rate movements on inflation has appeared to diminish in recent years.
Although central bank activity is not focused on earning a profit, quantitative easing and a negative deposit, which forces banks to pay for parking cash at the central banks, have been highly profitable.
The Bundesbank will therefore pay €1.9 billion worth of its profit into the German federal budget, up from €399 million a year earlier, the bank said. - Reuters
