The right timing for the European Central Bank (ECB) to unwind expansionary monetary policy is “not quite there yet”, according to a top official.
Inflation needs to reach a “stable trend” towards the central bank’s two per cent target before policymakers can contemplate any change in stance, according to Sabine Lautenschlaeger, an influential member of the executive board of the ECB.
Consumer prices rose at an annual rate of only 1.3 per cent in the year to June, although a slight pick-up in German inflation to 1.7 per cent in July suggests some inflationary pressure may be building. The reading for the Eurozone as a whole will be announced on Monday.
Lautenschlaeger, who sits on the rate-setting governing council, said the ECB must “prepare for the exit in good time”, because of the diminishing return and increased risks from a loose hold on the money supply.
However, in an interview published today with German newspaper Mannheimer Morgen she noted “expansionary monetary policy helps in the medium and long term”, despite growing negative side effects. These include the hit to bank profitability from low returns on bonds and the effect on savers, a bugbear particularly in Germany and other wealthier European economies.
Investors are keenly awaiting signs the ECB will start to rein in its monthly asset purchases. The central bank is currently buying €60bn (£54bn) of bonds per month on average, but there are currently no plans in place beyond the end of December.
ECB president Mario Draghi said last week a decision on asset purchases will be unveiled in the “autumn”, but he declined to offer any clarification on whether that would mean an announcement in September or October.
Meanwhile, 10 years after the first rumblings of the global financial crisis, Lautenschlaeger criticised efforts to roll back regulation, which have emanated in particular from the administration of US President Donald Trump.
Pointing to the highly interconnected global banking industry, Lautenschlaeger said global rules are necessary to protect from regulatory arbitrage around the world.
“I don’t believe in returning now to deregulation or to purely national rules,” she said. “That would be a big mistake.”
She added: “We need globally consistent rules for the activities of large banks, of banks which are important for the financial system. The crisis should have taught us that.”