Top European Central Bank officials have called urgently on Britain to draw up a post-referendum road map, warning the nation’s vote to leave the European Union would weigh on the eurozone’s economic recovery.
Speaking in London on Friday, the ECB’s top economist, Peter Praet, said renewed uncertainty from across the English Channel could weigh on confidence among eurozone businesses and consumers. He urged U.K. and EU officials to move swiftly toward a deal and said the ECB is “firmly determined” to push inflation back up and protect financial stability.
Benoît Coeuré, who sits alongside Mr. Praet on the ECB’s six-member executive board, said the “uncertainty shock” from the referendum inevitably would weigh on eurozone growth. Central banks will continue to monitor the situation closely and are ready to intervene, Mr. Coeuré said in an interview published on the ECB’s website.
The U.K. vote sent shocks through financial markets last week, putting pressure on European currencies and stocks and in particular the region’s banks. Central banks responded with pledges to provide cash to banks and deploy all the tools in their arsenals to maintain stable prices and safeguard the financial system.
Bank of England governor Mark Carney went further Thursday, signaling the bank is likely to unleash fresh stimulus measures over the summer. Analysts have suggested the ECB could follow suit as soon as September by cutting interest rates further below zero or expanding its EUR1.8 trillion bond-purchase programme again.
But Bundesbank President Jens Weidmann dealt a blow to such hopes Friday, signaling he would oppose any fresh ECB stimulus.
In a speech in Munich, Weidmann said the ECB’s policy mix, which includes subzero interest rates and EUR80 billion a month of bond purchases, is already “very expansionary.” He questioned whether fresh stimulus would achieve much more.
“I don’t see the need for further loosening of monetary policy,” Weidmann said.
Resistance from the Bundesbank makes any fresh ECB policy action less likely because Germany accounts for more than a quarter of the eurozone economy, even if it holds only one seat on the ECB’s 25-member governing council.
Still, Germany’s central bank has been overruled repeatedly in recent years as the ECB launched and expanded its bond-purchase programme, which the Bundesbank publicly opposed from the outset.
Weidmann conceded that the U.K. vote, which he described as “a mistake,” could reduce growth in the euro area and Germany slightly. “A long phase of heightened uncertainty is very possible,” he said.
Still, he said that there had been no signs of panic in financial markets and that fresh ECB stimulus wouldn’t remove the political uncertainty the vote created.
At a Brussels summit meeting Tuesday, ECB President Mario Draghi told EU leaders he expects the U.K. vote to reduce economic growth in the eurozone by up to 0.5% over three years, people familiar with the matter said. The economic hit is the result of the U.K.’s importance as a trading partner and the possibility of a perception the EU could become ungovernable, the people said.
If the ECB does decide to boost its stimulus again, as many economists expect, it isn’t obvious how it would do so. The central bank already is purchasing EUR80 billion a month of public and private debt under its so-called quantitative easing programme, which is currently due to end in March.
Boosting the programme again is tricky due to limits on the amount of debt the ECB can buy from individual issuers. The central bank’s lowest policy rate now stands at minus 0.4%, a level that banks complain hurts their profits and could raise the cost of loans.
Despite all that, inflation in the euro area was just 0.1% in June, according to the EU’s statistics office. While that was up from minus 0.1% the previous month, it is still far below the ECB’s near-2% target, which it has missed for more than three years.
“The toolbox is pretty empty,” said Carsten Brzeski, chief economist at ING-DiBa in Frankfurt. He expects the ECB to announce a nine-month extension of its bond-purchase programme in September, when it will have its new forecasts for growth and inflation.
In his speech, Praet defended negative interest rates, which he said had reinforced the impact of the ECB’s bond purchases and long-term loans to banks. The negative effects don’t outweigh the benefits for the wider economy, he said, in a sign that rates could fall further still.
Source: MarketWatch
