Praet Says ECB Guidance on Future Rate Path to Gain Importance

(Bloomberg) -- The European Central Bank’s communication on how it will adapt policy beyond its first interest-rate hike will become increasingly important moving into next year, Executive Board member Peter Praet said on Thursday.

While the ECB currently expects to keep rates at record lows “at least through the summer of 2019” -- which investors have interpreted as meaning a hike late next year -- market scrutiny will likely turn to what happens further out on the central bank’s interest-rate trajectory.

In order for market pricing to “remain consistent with a continued gradual inflation convergence, our communication on policy adjustments beyond the first rate hike will become increasingly important,” Praet said at a conference in New York.

The ECB chief economist’s remarks follow a speech earlier this week by his colleague Benoit Coeure, in which the Executive Board member outlined how the central bank might go about communicating future policy adjustments while maintaining flexibility. He cautioned against publishing a precise numerical forecast for future path of rates, preferring instead to link it economic conditions.

The ECB is poised to cap its bond-buying program at the end of this year, a first step toward reversing the crisis-fighting measures that massively expanded its balance sheet and brought its interest rate below zero. Praet said he’s optimistic that inflation will continue to develop favorably, despite a recent rise in external risks.

“The strength of the economy supports our confidence that the sustained convergence of inflation to our aim will proceed and will be maintained even after a gradual winding-down of our net asset purchases,” he said.

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