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A member of the Governing Council and the governor of the Bank of Lithuania, who is resigning next month, said in an interview that the ECB should remember its past experience and not tighten up policy too quickly: it would be worth going back to standard measures.
Even when inflation returns to its pre-pandemic trajectory, policymakers will have to maintain quantitative easing for “quite some time,” he predicted.
“I don’t think we can afford to change monetary policy abruptly, especially considering the historical experience,” Vasiliauskas said on Monday. “It would be wiser to live a bit in a transitional situation.”
Over the past decade, ECB officials have been forced to step back by limiting or prematurely canceling monetary support. For example, the purchase of bonds in 2018. It was suspended at the end of 2011 but resumed a year later in the wake of the economic recession. had to cancel two interest rate increases.
The emergency procurement program for a € 1.85 trillion pandemic is expected to continue for at least another year. 2015 The quantitative easing plan launched in 2006 is of indefinite duration and refers only to progress in the sustainable increase of inflation in the euro area by 2%. Link.
“I do not think that applying the incentives for too long is a great risk, compared to the reaction after the cancellation of those incentives,” said V. Vasiliauskas, adding that no decision would be made on how to end the program of crisis. It is expected until the fall.
V. Vasiliauskas, 47, headed the Bank of Lithuania for a decade and became the policy maker of the ECB in 2015, when Lithuania joined the euro area. He now joins the Executive Board of the International Monetary Fund as its representative in the Baltic and Nordic regions.
The ECB is currently stepping up bond purchases to avoid higher borrowing costs, reflecting the growing gap between the euro area and the US economies. The US recovery is driven by rapid vaccination rates and huge fiscal support, while the eurozone is under pressure from extended quarantine restrictions due to strict vaccination.
Central banks in the region have bought an average of 20,000 million euros a week in debt during the last two weeks to keep financing conditions favorable for governments, companies and households. V. Vasiliauskas made it clear that investors can expect this pace to continue.
“I don’t see the need to change anything at this point,” he said.
While acknowledging that the bloc is struggling to overcome the crisis, Vasiliauskas confirmed that the latest ECB forecasts for economic recovery from next quarter are still valid.
The institution’s employees forecast this month that the economies of 19 countries will contract in the first quarter and grow at least 1.3 percent in the next three. They provide 4 percent throughout the year. growth, although it is not enough to offset last year’s 6.6%. contraction.
“I am optimistic about the balance of risks and what we can see, what we can expect in the second half of this year,” said the bank manager. “The forecasts reflect reality, I would not say they are too pessimistic or optimistic.”
He also noted, reiterating the views expressed in recent interviews by Governing Council colleagues Martins Kazaks of Latvia and Peter Kazimir of Slovakia that the impending hike means that the ECB will not enforce the current level of borrowing costs forever.
“Some changes in financial conditions are completely natural if you face some positive changes in the economic outlook,” he said. – An increase in yields and other fees cannot be avoided. The key is to find out if this is a natural result of economic development or if something is wrong. “
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