Liikanen Cautions Against Tightening ECB Policy Too Soon

(Bloomberg) -- European Central Bank Governing Council member Erkki Liikanen said that exiting from unprecedented stimulus can be more safely done once expectations for inflation exceed policy makers’ goal.

He said that price pressures remain lower than expected and noted that the ECB’s target is “symmetrical.” Inflation in the euro area was just 1.1 percent in February, compared with the aim of just below 2 percent.

“A gradual tightening of monetary policy will rest on a more solid basis when indications of inflation rates to potentially temporarily exceed 2 percent become more prominent in inflation expectations,” the Finnish central bank governor said on Tuesday.

Liikanen Cautions Against Tightening ECB Policy Too Soon

The comments present one of the more cautious views among the Governing Council, which is expected to wind down net asset purchases by the end of this year and raise interest rates for the first time in the middle of 2019. They stand in contrast to the more hawkish case Bundesbank President Jens Weidmann presented on Monday, when he argued that inflation predicted to be “more or less” in line with ECB’s goal in 2020 warrants a start of policy normalization soon.

Liikanen Cautions Against Tightening ECB Policy Too Soon

Liikanen said that even though the ECB’s “basic message is very positive,” with broad-based economic growth and steadily declining unemployment, there aren’t any “trustworthy” signs yet of a sustainable pickup in underlying inflation. In that context, “it’s important to remember” that bond buying -- currently scheduled to end in September -- could be extended.

“It’s open ended, this decision,” Liikanen said, reiterating that policy will remain accommodative even after the end of net purchases because of the ECB’s commitment to keep interest rates low and reinvest the proceeds from maturing debt.

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