(Bloomberg) — European Central Bank policy makers wary of ever-more monetary stimulus have fired the first warning shots two weeks before they meet to discuss bolstering the euro-zone economy.
Dutch Governor Klaas Knot said in an interview on Thursday that the outlook isn’t yet weak enough to warrant the resumption of bond purchases. Executive Board member Sabine Lautenschlaeger told MNI that she opposes restarting quantitative easing, saying it should only be a last resort. Their comments echoed Germany’s Jens Weidmann, who a few days earlier said speculation over a large stimulus package “doesn’t do justice” to the latest data.
While both men have a history of being hawkish, their latest outspokenness gives President Mario Draghi and his Executive Board something to mull over as they prepare proposals for the Sept. 12 session. Draghi primed investors after the previous meeting in July to expect some form of stimulus, describing the economy as “getting worse and worse” and ordering ECB staff to examine all policy options including resuming quantitative easing.
“Sometimes one of the things you notice is — whether it’s a hawkish move or a dovish move — that the people on the other side of the argument start becoming more explicit and vocal when they’re basically losing the argument,” said Nick Kounis at economist at ABN Amro in Amsterdam. “That basically is where we are.”
One fundamental disagreement is over whether the ECB should only deliver an next month — which Knot said he is open to — or something bigger. That’s partly about the economy, which is battered by a manufacturing recession, trade tensions and Brexit uncertainty but which also shows occasional bright spots. It’s also about how much firepower the central bank has left.
“If deflation risks come back on the agenda then I think the asset-purchase program is the appropriate instrument to be activated, but there is no need for it in my reading of the inflation outlook right now,” Knot said in an interview in Amsterdam. “Not reactivating the asset-purchase program also means you keep some powder dry for when actually future contingencies happen.”
Euro-area data due Friday is predicted to show holding at 1%, compared with a goal of just under 2%. At the same time, economic confidence unexpectedly improved in August and the French economy grew faster than initially estimated in the second quarter.
On the dovish side, Finnish Governor Olli Rehn has fueled the debate by calling for an “impactful” package that overshoots expectations. Draghi’s successor from Nov. 1, Christine Lagarde, weighed in with written answers to a European Parliament questionnaire published Thursday. She said the ECB hasn’t hit the lower bound on rates, and has a “broad toolkit” which it can and should use to tackle a downturn.
“Given the summer break, there has likely been little opportunity for governors to get a sense of how the balance of opinion in the Governing Council is moving,” Greg Fuzesi, an economist at JPMorgan (NYSE:), said in a note. “While it might seem easy to dismiss comments from Weidmann and Knot as possibly too hawkish to influence most governors, their sense that the growth outlook is still hard to gauge is likely shared by some other governors.”
Draghi will be acutely aware that failure to deliver a large stimulus package risks tightening financial markets and worsening the already-protracted slowdown. Knot’s comments sent the euro and bond yields higher.
Investors have recently stepped up predictions for a package of measures. Banks including Goldman Sachs (NYSE:), Nomura, and ABN Amro predict a new round of QE. Societe Generale (PA:) said this week that it now sees the ECB cutting the deposit rate by 20 basis points to minus 0.6% and announcing that it’ll start buying 40 billion euros ($44 billion) a month of debt.
What Bloomberg’s Economists Say
“Persistent weakness in the CPI data, a decline in inflation expectations and a lower path for global oil prices, as implied by futures markets, will likely prompt the ECB to revise down its inflation forecast, and announce a large stimulus package in September.”–Maeva CousinRead her EURO-AREA PREVIEW
“The market expectations are overdone,” Knot said. “If stimulus is warranted to protect the resilience of domestic demand then I think conventional policy easing would be the appropriate instrument to contemplate — so a rate cut.”
Lautenschlaeger said in an interview with MNI published Friday that it is “much too early for a huge package” and that sticking to the ECB’s self-imposed limits on how much it can buy — aimed at avoiding breaching laws on monetary financing of governments — is of “utmost importance.”
Speaking to Frankfurter Allgemeine Zeitung at the weekend, Bundesbank President Weidmann warned against blindly reacting to calls for more central-bank support.
Slovak Governor Peter Kazimir, a former politician who joined the ECB this year, this week highlighted the risk that such dissent brings, saying officials will need to muster “broad unity” in favor of more monetary stimulus if they are to make it credible. Knot signaled he’s not there yet.
“We don’t have deflation risks and we don’t even have recession, but we still have Brexit uncertainty looming and that is not going to be resolved by Sept. 12,” he said. “If we stay in this somewhat-below-potential growth world, the next shock might actually take us into recession, and what do we do then?”