The ECB’s case for ending QE before rate hike
ECB chief economist warns that premature rate hike could undo benefits seen over the past several years
The debate within the European Central Bank over whether or not to raise interest rates before ending quantitative easing appears all but decided, reports Bloomberg. While some ECB officials continue to argue earlier rate hikes would be necessary under certain circumstances, the likelihood of that happening is low.
ECB executive board member Peter Praet, the chief economist and person tapped to present the Board’s monetary-policy proposal, says that the path which puts off the rate hike is based on “strong logic.”
“Look, there is a very strong chain of logic behind the decision to first scale back QE, raising the term premium included in long-term rates, and only then hiking short-term rates. We have to scale back our policy in an orderly fashion if we don’t want to undo the benefits of what we’ve been doing for the past few years,” Praet said in an interview last week.
There still remains an argument that raising rates are necessary if the negative deposit rates damage monetary-policy transmittion by squeezing banks’ margins. Though the central bank argues it has no obligation to support the profit of lenders, there is no doubt that it cares about banks’ ability to offer credit.
The ECB Governing Council’s June 8 meeting will likely see members coalesce around Praet’s argument, though any sign that the lower rates pose a threat to the ability of banks to offer credit will keep the debate alive moving forward.