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ECB’s Knot Says Economy Doesn’t Yet Warrant Resumption of QE
2019-08-29 14:37:31.220 GMT

By Piotr Skolimowski and Ruben Munsterman
(Bloomberg) — European Central Bank policy maker Klaas
Knot said the euro-area economy isn’t weak enough to warrant the
resumption of bond purchases and such a step shouldn’t be taken
unless the slowdown worsens.
While the Dutch central-bank governor said he’s open to an
interest-rate cut, his remarks echo those by his German
colleague Jens Weidmann and suggest President Mario Draghi will
have a fight on his hands if he’s planning a strong package of
monetary stimulus at the ECB’s Sept. 12 meeting. Investors have
stepped up predictions that he’ll deliver lower rates and resume
quantitative easing.
“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 Amsterdam on
Thursday. “Not reactivating the asset-purchase program also
means you keep some powder dry for when actually future
contingencies happen.”
Draghi primed investors after July’s meeting to expect some
form of stimulus, describing the economic outlook as “getting
worse and worse” and ordering ECB staff to examine all policy
options. He’ll be acutely aware that failure to deliver a large
stimulus package risks tightening financial markets —
potentially driving the euro and bond yields higher — and
worsening the already-protracted slowdown.
His successor from Nov. 1, Christine Lagarde, weighed in
with written answers to a European Parliament questionnaire
published Thursday, in which she said the ECB hasn’t hit the
lower bound on rates and has the tools to tackle a downturn.
Read more: Lagarde Says ECB Hasn’t Hit Lower Bound on
Interest Rates
While another rate cut is widely predicted, banks including
Goldman Sachs, Nomura, and ABN Amro have also predicted a new
round of QE. Societe Generale 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.
Finnish Governor Olli Rehn fueled the increasingly heated
debate when he called for an “impactful” package that overshoots
expectations.

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 Cousin
Read her EURO-AREA PREVIEW
The region has shown little sign of escaping the downturn.
Germany, the largest economy, reported rising unemployment and
weaker inflation on Thursday as it teeters on the edge of
recession. U.S. President Donald Trump has persisted with
protectionism and railed against the weakness of the euro, and
the U.K. is headed for a potentially disorderly Brexit on Oct.
31 that would hit continental businesses.
Euro-zone consumer-price data due Friday is expected to
show inflation at 1%, far below the ECB’s goal of just under 2%.
Yet there are occasional bright spots. Euro-zone economic
confidence unexpectedly improved in August and the French
economy grew faster than initially estimated in the second
quarter.
*T
Read more…Societe Generale Sees ECB Launching Open-Ended QE
Next MonthEuropean Economic Confidence Unexpectedly Rose in
August (1)Weidmann Revisits Dr. No Stance as ECB Stimulus
Decision Nears
*T
QE was capped at the end of last year after 2.6 trillion
euros of purchases, with the ECB shifting its focus to simply
reinvesting the proceeds of bonds as they mature. Knot said
there was no “valued added” in launching a package of measures.
“The market expectations are overdone,” he 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.”
SocGen also predicts a measure to soften the impact of
negative rates on banks. Draghi has said the ECB will consider
steps such as exempting some bank reserves from the charge,
which compresses banks’ profitability and threatens to hinder
their lending to companies and households. Knot said he’d be
“reluctant” to support such a move unless there is a strong
monetary-policy rationale.
Bundesbank President Weidmann said in a newspaper interview
published last weekend that would be “wrong for us to act for
action’s sake” and that speculation over large stimulus “doesn’t
do justice” to the latest data.

Credibility Risk

Such resistance from the German central banker has been a
regular feature over the years and is unlikely to be enough in
itself to thwart any plans by Draghi. Still, if that view is
also held by Knot as well as traditional policy hawks such as
Executive Board members Sabine Lautenschlaeger and Yves Mersch,
the next meeting could turn contentious.
Slovak Governor Peter Kazimir, a former politician who
joined the ECB this year, highlighted the threat any significant
dissent poses, when he said 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?”

To contact the reporters on this story:
Piotr Skolimowski in Frankfurt at pskolimowski@bloomberg.net;
Ruben Munsterman in Amsterdam at rmunsterman1@bloomberg.net
To contact the editors responsible for this story:
Paul Gordon at pgordon6@bloomberg.net
Zoe Schneeweiss