MNI ANALYSIS: Opposition Against ECB Draghi's APP Gets Louder

--Policy Hawks On ECB's Inner Sanctum Find Their Voice

By Christian Vits

     FRANKFURT (MNI) - Just five weeks ago, European Central Bank President

Mario Draghi announced another extension of the bank's asset purchase program,

albeit at a reduced monthly amount.

     And it was no surprise, when a day later Bundesbank President Jens Weidmann

repeated his criticism that trimming the program without determining an endpoint

was what he saw as the border between monetary and fiscal policy blurred through

the buying of government bonds.

     But things seem to have changed and moved on apace in the meantime.

     Benoit Coeure, a long-standing ally of Draghi, was said to have expressed

sympathy with a given end-point for the APP, a surprise for many observers. In a

later interview with a French newspaper, Coeure said he hoped "that this will be

the last extension."

     Most of the other dissenters against the ECB's policy stance, namely Ewald

Nowotny, Ardo Hansson and Klaas Knot, have publicly spoken out in recent few

weeks, giving the opposition camp within the Governing Council a more powerful

voice. To date, of the supposed hawks, only Executive Board member Sabine

Lautenschlaeger has remained silent.

     "There is kind of a movement, because more and more colleagues think that

we are in danger that the cost of the expansionary monetary policy slowly

exceeds the benefit," Nowotny said in early November.

     Ardo Hansson, Governing Council member and President of the Estonian

central bank, reinforced this stance. In an exclusive interview with MNI, he

stated that "if the economy evolves broadly as we expect, if we see an uptick in

inflation and if it looks sustainable, this element of the program could be

phased out," after September next year.

     A reduction of the bond buys to zero "has to be one of the options, that is

on the table," he added.

     Klaas Knot, Governor of the Dutch central bank, was the latest contender to

join the chorus. In a speech given in London on Wednesday, he said that

"continued monetary expansion is not a free lunch".

     He added that "absent deflation risk, a full phasing-out of net asset

purchases from September 2018 onwards is warranted. Our communication will have

to shift accordingly, from net asset purchases and incremental stimulus towards

reinvestment and preservation of broadly accommodative financing conditions."

     That was a heart shot to Draghi's current monetary policy stance.

     --LIVELY DEBATE AT OCTOBER MEETING

     The minutes of the October policy meeting revealed that the discussion

about the policy was more lively than seen over the previous 18 months.

     The ECB noted that "a view was put forward that there was no longer a case

for an open-ended extension, unless deflation risks were to re-emerge." It was

also argued that the balance of costs and benefits was becoming "increasingly

unfavourable" as time progressed.

     Several members argued to end the bond buying after the extension period in

September next year or at least to set an intended end-point. They said the APP

did not appear justified given the current rock-solid economic development and

in the absence of major new shocks.

     The dissenters also voiced concern that the open-ended shape of the program

and the soft wording could generate expectations of further extensions and

reinforced their view to change communication accordingly.

     But the ECB faces a problem with respect to its inflation-targeting

approach. Inflation has hovered well below its target of "below, but close to

two percent".

     In November, euro area inflation edged higher from the October print, while

the stubbornly low core reading was unchanged, according to preliminary data

released by Eurostat on Thursday.

     The November headline reading of 1.5% on the year was below market

expectations centring on 1.6%, but above the 1.4% recorded in October.

     Still, it looks more and more like Governing Council members are taking the

stance that deflationary pressures are not on the horizon and that the Council

should take a tougher stance on monetary policy.

     What's more, the ECB already seems to have run out of ammunition, even if

another crisis would emerge, as there are simply no more assets the central bank

can buy if needed.

     It still has to be seen whether the majority in the Council will shift

towards a more neutral stance of policy. But time --  and the economy --

possibly works for the contenders.

--MNI Frankfurt Bureau; +49 69 97782671; email: christian.vits@marketnews.com

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