Internal Feuding Within the ECB Over Tapering: Reflections on Monetary Policy

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Published : July 09th, 2017
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Category : Opinions and Analysis

At the Fed, the debate is over normalization of the balance sheet. The Fed has already finished tapering. The ECB is still addicted to a balance sheet build-up. But i

In contrast, the ECB is still addicted to a balance sheet build-up. But internal feuding has picked up with Germany and the hawks on one side and doves on the other.

Bloomberg reports ECB Officials Disagree on How Much Is Too Much for Stimulus Plan.

“Underlying inflationary pressure remains subdued” and “we still need a long period of accommodative policy,” Executive Board member Peter Praet, the ECB’s chief economist, told Belgian newspaper De Standaard in an interview published on Saturday. “Inflation is picking up, but that is a process that is a long way from completion,” Praet said. “From an inflation perspective, we cannot be satisfied yet.”

Governing Council member Klaas Knot, speaking on Dutch television on Friday night, warned that the central bank is “very close to the point” of keeping quantitative easing for too long. Knot, noted that the last financial crisis was partly caused by too much money being pumped into the system, and so the ECB should be wary of going too far with stimulus.

“If we carry on with this policy for too long, that is absolutely a potential danger,” he said. “The difficulty is that one cannot determine objectively when the moment is when we have continued with this policy for too long. I think that we have gotten very close to that moment.”

Autumn Review

French central bank head, Francois Villeroy de Galhau, says Autumn the Season to Adapt Stimulus Plan.

The European Central Bank is likely to decide on the next change in its stimulus settings in the fall, when it will continue the process of tweaking its measures to reflect the euro area’s upturn, according to Governing Council member Francois Villeroy de Galhau.

“What we have to do, and what we started to do, is to adapt the intensity of this accommodative monetary policy to the progress toward our inflation target and toward economic recovery,” he said in a Bloomberg Television interview on Saturday. “In the future, and this will be our decision next fall, we will go on adapting the intensity of this monetary policy.”

The French central-bank governor’s remarks may be the most definitive yet on when the ECB will take action on its 2.3 trillion-euro ($2.6 trillion) asset-purchase program, which is currently scheduled to run until the end of the year. While he is just one of 25 Governing Council members who decide monetary policy for the currency bloc, concerns are rising among some of his colleagues that time is running out if they are to avoid undesirable market volatility.

Villeroy de Galhau’s choice of wording — “adapt the intensity” — which he said three times, adds to signs that the ECB intends to pare back stimulus in a way that doesn’t tighten financial conditions. Officials are concerned that while growth is picking up, inflation and wages are not.

Villeroy de Galhau said that what matters most is the real economy, and that the ECB should not let itself be distracted by political pressures or investor impatience.

“The most influential members of the Governing Council are pragmatists,” he said. “I clearly am a pragmatist.”

President Mario Draghi signaled last month that he sees the expanding economy as allowing room for maneuver on stimulus while still maintaining the same level of monetary accommodation.

Volatility Suppression

The pragmatists seek volatility suppression while waiting for 2% inflation.

Volatility suppression, inflation targeting, and market accommodation have created three consecutive bubbles, the third of which central bankers are totally oblivious to.

Knot warns that the central bank is “very close to the point” of keeping quantitative easing for too long.

Actually, there never should have been QE in the first place. Not a single structural problem in the USA or Europe has been addressed in the past 10 years.

The Italian banking system is insolvent. France, Italy, and Greece need massive work rule reform. One size fits all interest rate policy does not work.

Accommodative monetary policy cannot fix structural problems. Rather, it tends to prolong them.

Mike “Mish” Shedlock

Source : mishtalk.com
Data and Statistics for these countries : France | Georgia | Germany | Greece | Italy | All
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Mish 13 abonnés
Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management. He writes a global economics blog which has commentary 5-7 times a week. He also writes for the Daily Reckoning, Whiskey & Gunpowder, and has over 80 magazine and book cover credits. Visit http://www.sitkapacific.com
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