ECB Pleased Investor Views on Stimulus Exit Align With Their Own

(Bloomberg) -- European Central Bank officials told investors from around the world that they’re right to bet on a gradual reduction of monetary stimulus in the euro area.

On the eve of a Group of 20 meeting of finance chiefs in Buenos Aires, Governing Council members Klaas Knot and Francois Villeroy de Galhau expressed confidence that inflation in the 19-nation region is making progress in reaching the institution’s goal amid robust and broad-based economic growth.

“There is some kind of welcome alignment of stars between the economic background which I mentioned, market expectations and the convergence of these market expectations toward our own views within the Governing Council,” Villeroy de Galhau, who also heads the French central bank, told a conference organized by the Institute of International Finance. “At present, there is very little debate within the Governing Council.”

Policy makers moved closer to scaling back unprecedented monetary support this month, when they unanimously decided to drop a pledge to step up asset purchases if needed. Bond buying is widely believed to end this year, and financial markets are bracing for an interest-rate increase sometime in the middle of next year.

Inflation Outlook

Knot, the governor of the Dutch central bank, said at the same conference that the outlook for consumer prices in the euro area “has already been quite stable” over several forecast rounds. “That provides me with a high degree of confidence that inflation will pick up and will at some point approach our definition of price stability.”

The ECB predicts inflation will average 1.7 percent in 2020, compared with its goal of below and close to 2 percent. The rate stood at 1.1 percent in February. Economic growth is seen at 2.4 percent this year.

“The outlook is almost as good as it gets,” Knot said. “According to our best effort, we think the output gap has been closed at the end of last year and that we’re now firmly into expansionary territory. There are maybe some medium-term clouds on the horizon but in the short run, I would say that the outlook is pretty favorable.”

One risk identified during the debate that will also feature prominently in the G-20 meeting over the next two days was restrictive trade policies.

“Protectionist measures would increase uncertainty and would be, are today a major threat or a major possible blow to the synchronized expansion we see,” Villeroy de Galhau said.

To contact the reporters on this story: Jana Randow in Frankfurt at jrandow@bloomberg.net, Rainer Buergin in Buenos Aires at rbuergin1@bloomberg.net, Randall Woods in Washington at rwoods13@bloomberg.net.

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Andres R. Martinez

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