MNI EXCLUSIVE INTERVIEW: ECB Smets Favours Extended QE Taper

By Jack Duffy

     BRUSSELS (MNI) - In current market conditions it may make sense for the

European Central Bank to lower the pace of its asset purchases but to extend the

program for a relatively longer period, Governing Council member Jan Smets told

Market News International in an exclusive interview. 

     "I agree with this assessment in a context where market conditions have

largely normalized," said Smets, who heads the Belgian central bank. 

     "When there is more uncertainty, you would probably see more merits from a

higher purchase pace. Given that we still need more confidence on inflation, I

think a certain duration would be an interesting feature," he added.

     Smets said there was "broad agreement" at the September policy meeting to

take the bulk of the decisions regarding the recalibration of the asset purchase

program and other policy instruments at the Oct. 26 meeting. 

     A key debate at the meeting is expected to be the pace of asset purchases

versus the duration of the program, with some council members arguing for a

fixed tapering schedule and others a more flexible, extended approach. Many

analysts see the pace of purchases being reduced to E40 billion per month in

January from E60 billion currently.

     Smets said he expected any recalibration of be "gradual and cautious" but

that neither an expected weakening in the pace of headline inflation in the

months ahead or the continued relative strength against the euro would likely

prompt a monetary policy response.

     "The expected temporary drop in headline inflation is mostly due to base

effects from past energy price inflation. Monetary policy should not react to

that and you could apply a look-through approach," he said.

     Eurozone inflation was a weaker-than-expected 1.5% in September and ECB

staff have warned that it could fall below 1.0% in the first quarter of next

year due to year-on-year changes in prices for crude oil and unprocessed food. 

     He also acknowledged that the QE bond buying program could face constraints

next year from the 33% issuer limit and the lack of bonds available to buy in

certain markets, but he said he was confident that the entire monetary policy

package could be adjusted and still deliver the stimulus needed to support

inflation.  He confirmed that there has been no discussion about changing any of

the parameters of the QE program. 

     "We have to include these constraints in our recalibration," he said. "But

these are constraints only to the asset purchase program not to the efficiency

of our overall policy package." 

     Smets said the recalibration was coming "in a context where the economy is

behaving better and where we should see a further closing of the output gap and

a rise in inflation. But our latest assessment was clear that inflation still

needs to be supported by monetary policy." 

     On the euro, which is down from its recent peak of around $1.21 but still

up 12% against the dollar this year, Smets said he saw no cause for concern. 

     "I think you should not be worried to the extent that the appreciation is

simply reflecting the better shape of your economy," he said. "It's a natural

thing. And then the better economic conditions may largely compensate the impact

of that appreciation." 

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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