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Will the European Central Bank raise interest rates before it calls time on its bond-buying spree? Such a move seemed a little more likely on Friday, following remarks by one of its governing council’s most influential officials.
The attention of ECB watchers in recent weeks has fixed on whether the bank will abandon a previous commitment to keep interest rates at record lows until it ends bond purchases under quantitative easing.
The focus is on whether the ECB will raise its deposit rate, now minus 0.4 per cent, before QE comes to a close — probably at some point in 2018.
The negative interest rate has long been a bugbear of the region’s banks, which blame it for their low profit margins. The heads of the Austrian and French central banks are both supportive of the idea of raising the deposit rate, but up until now it has seemed that the ECB’s inner circle — the Executive Board — was against it.
But Benoît Cœuré, executive board member responsible for markets, on Friday signalled that he could support the idea. Mr Cœuré indicated in Brussels that the bank could alter its commitment to sequence rate rises after QE, should the outlook for inflation change.
Here are the key parts of the text:
The variable component of our guidance demands that we: (i) regularly re-assess the medium-term price stability outlook, (ii) run this assessment through our reaction function, and (iii) decide whether or not our policy expectations on the horizon and pace of our asset purchase programmes, on the level of our policy rates (“present or lower”) and on their expected endurance (“well past …”) need adjustment.
Should we conclude that an adjustment is needed, we should not hesitate to adapt our communication. After all, abandoning the intimate link between our policy expectations and our assessment of the progress towards a sustained adjustment in the path of inflation would risk creating the false impression that we had changed our reaction function – a dangerous path towards time-inconsistency…
Ultimately, also the choice of sequencing of policy instruments will be the outcome of our regular assessment of the medium-term price stability outlook, reflecting the state-dependent nature of our expectations of the horizon over which our policy instruments are likely to be maintained.