The European Central Bank is nearing one of its most important decisions in a delicate process: winding down the massive amount of stimulus it has been injecting into the euro zone economy over the past few years.
The biggest question facing the ECB’s governing council when it meets next Thursday: Should it set a date for the end of a trillion-euro bond-buying plan that has been running since March 2015? Or should it simply start the process by cutting the amount of government and corporate debt it buys per month, and leave the final end-date for the program open?
Ardo Hansson, head of the Estonian central bank and a voting member of the ECB’s governing council, said nothing has been decided yet. But in an interview he said that the direction at least is clear. “I would personally like to see that we are on a clear path to reducing the level of such purchases,” he told Handelsblatt. “What precise date [and] which precise form is still open…but I wouldn’t want to see us several years down the road still thinking about continuing with these purchases.”
At the same time, Mr. Hansson urged financial markets not to spend too much time focusing on the bond-buying program alone. Just because the ECB stops buying bonds doesn’t necessarily mean it will be less accommodative. “You could easily see reducing the level of purchases but partly compensating by doing something else in other areas,” he said.
“It's possible to have changes in composition... maybe we buy somewhat less public sector [debt], but why not continue with the private sector?”
For example, Mr. Hansson suggested adjusting the mix in the bond buying program to focus more on corporate bonds and less on government debt. “I’ve actually liked these purchases of corporate sector bonds,” Mr. Hansson said, adding he has long been more skeptical of the public sector bonds that currently make up the lion’s share of the ECB’s monthly purchases. “It’s possible even to have changes in composition, where maybe in the future we buy somewhat less public sector [debt], but why not continue with the private sector?” he asked.
Mr. Hansson wouldn’t comment on how many other members of the ECB’s governing council, which meets every six weeks to tweak the central bank’s monetary policy, think the same way he does. What’s clear is that decision time is coming.
Currently the ECB buys about €60 billion in bonds from the euro zone every month. The central bank hasn’t said how and if it will continue the program beyond December, but analysts widely expect the ECB to cut back by perhaps as much as €30 billion per month starting in January. What’s less clear is just how long the ECB might continue its purchases at such a lower level, nor is it clear whether it will specify when (or whether) it will end the program altogether. The Federal Reserve chose an end-date when it underwent a similar process of winding down its “quantitative easing” program back in 2014, but has since questioned whether restricting its options was the right way to go.
Either way, Mr. Hansson said the euro zone’s strengthening economy is a clear reason to at least start pull back on the throttle. “The economy is in much better shape than it was a while ago…in this situation I think it”s better to think of making mild adjustments to policy to have it slightly less accomodative than it was before,” he added.
Mr. Hansson said financial market expectations, while they’re being monitored, shouldn’t play a significant role in how the ECB decides to move forward. Germany’s blue-chip DAX hit an all-time high of more than 13,000 earlier this week, but some investors have expressed concern that a crash could be coming as central banks pull their easy money out of the system.
Mohamed El-Erian, chief economist of Allianz, in an interview warned that those high stock-market valuations were not justified by the state of the global economy. Rather, they reflect an expectation that central banks will continue to provide liquidity. He said there were “very strong arguments” for the ECB to start normalizing its monetary policy.
Jens Weidmann, president of Germany’s central bank and long a skeptic of the bond-buying plan, has also urged the ECB not to wait much longer before cutting back. He even suggested raising interest rates, currently at a record low of 0 percent, should be on the cards again. “Any low-interest-rate phase should not be allowed to persist and, once an upturn sets in, action should be taken to swiftly and rigorously tighten monetary policy again,” he told Handelsblatt’s sister publication WirtschaftsWoche last week.
That makes the ECB’s key question – when and how to stop its bond-buying program – all the more important.
Helmut Steuer, Handelsblatt’s correspondent for Scandinavia, conducted the interview with Mr. Hansson. Michael Maisch of Handelsblatt contributed reporting and Christopher Cermak adapted the interview for Handelsblatt Global. To contact the authors: email@example.com and firstname.lastname@example.org