ECB starts to plot course for interest rate rise from June
The European Central Bank (ECJ) should use its June meeting to start building the case for unwinding its monetary stimulus before making a more formal announcement in the autumn, according to Governing Council member Vitas Vasiliauskas.
When and how the ECB can wean markets off cheap monetary financing, and ultimately raise interest rates, is becoming an increasingly pressing issue.
The ECB should say the risks to the euro area's economic growth are now balanced, and consider changing its forward guidance to reflect that it's more likely to tighten than ease monetary policy, the Lithuanian central-bank governor said in an interview on Thursday.
Even so, he urged caution and said he sees no reason to change the intended sequencing of an exit from its measures.
"With regard to possible decisions, I would wait for maybe autumn," said Vasiliauskas (43). Holding off until December "would probably be too late, because then you have not enough space or room before the programme ends." Three weeks before the Governing Council's meeting in Tallinn, a consensus is forming that officials need to start preparing the market for an end to bond purchases and - eventually - an end to negative interest rates.
The focus of the debate is now largely on the pace of change, with some policy makers saying that the process can be drawn out and others concerned about moving too slowly.
The ECB's guidance currently states that it intends to keep buying €60bn a month of debt until at least the end of December, and even increase that volume if needed. It also says interest rates will stay at "present or lower levels" until "well past" the end of quantitative easing.
"Everybody is prepared to discuss forward guidance in June, and my personal view is we take a look into the hard data and then we'll discuss the speed of changing of communication," Vasiliauskas said. "I don't want to make big surprises for the markets."
He doesn't see "any worries for the moment" that a scarcity of bonds could mean QE running up against the self-imposed limits of the programme - parameters could change if needed.
The ECB's chief economist, Peter Praet, has argued for extreme caution in signalling and implementing the removal of stimulus, saying the real economy still has to catch up with the buoyant sentiment in surveys.
That position has been largely backed by vice president Vitor Constancio. Still, executive board member Benoit Coeure warned on Thursday that policy makers can't wait too long, saying that if communication deviates from economic reality then there is a risk of more market volatility when decisions are taken.
Vasiliauskas defended the plan to finish QE first and only starting to raise rates later, saying any talk of lifting borrowing costs is premature. "My way of thinking is to prioritise," he said.
"We have to speak about the balance of risks, then we should discuss and say something on the easing biases, then the programme, and only then rates."
Coeure has said that if the record-low deposit rate, at minus 0.4pc, starts to impair the ability of banks to transmit monetary policy then there would be case for raising it. Vasiliauskas cautiously agree with that view.
"If it's damaging then yes, but for this kind of decision we need to have evidence," Vasiliauskas said.
"The new reality, inefficiency, non-performing loans and other classical factors make a negative impact on the banking sector rather than the transmission mechanism and negative interest rates."
As the ECB prepares for the June 8 meeting in the Estonian capital, he said his impression is that most officials agree they need to send a clear message and move at a cautious pace.
"I don't think now we have big noise," Vasiliauskas said. "Personally I feel very comfortable." (Bloomberg)