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By Luke Heighton
FRANKFURT (MNI) - Eurozone monetary policy will remain predictable and
proceed at a gradual pace following a rotation away from unconventional measures
such as asset purchases towards forward guidance, the European Central Bank's
chief economist said Tuesday.
June's ECB Governing Council meeting sent an "important signal of a
normalisation of our policy instruments" and the "likely future evolution" of
forward guidance through the summer of 2019, Peter Praet said, while enhanced
forward guidance "remains an effective firewall to insulate the euro area from
unwarranted tightening pressures originating elsewhere".
Here are the key points from the speech in London:
-- The ECB's reinvestment policy "implies that the bonds we have purchased
will remain on our balance sheet for an extended period of time after the end of
net purchases ... If the central bank wants to exert downward pressures on
long-term interest rates, then it can absorb duration risk from the market by
purchasing securities with a relatively longer maturity. This frees up more
risk-bearing capacity for investors, which they can re-allocate towards other
types of risk, including investment in productive capacity. For a central bank
to set this mechanism in motion, it needs to hold a large stock of long-dated
securities embodying duration risk".
-- The ECB's reinvestment policy will also contribute to maintaining
favourable liquidity conditions "for an extended period of time". "Of course,
our portfolio - even if kept constant - will tend to lose duration over time, as
the securities held gradually mature. At some point, this passive loss of
duration will begin to exert increasing upward pressures on the term premia.
Over time, this gradual process will tend to steepen the yield curve, with our
forward guidance on policy rates keeping the front end of the curve
well-anchored", Praet said.
-- Surveys of market participants' expectations regarding the most likely
date for a first rate increase indicate that the "at least through the summer of
2019" formulation has been solidly internalised by market participants, Praet
said. Looking ahead, "the rotation implies that our key policy rates and forward
guidance about their evolution will become an anchor for monetary policy as the
end of our net asset purchases is nearing". ECB communications "and the rate
path itself, will be calibrated to ensure that inflation remains on a sustained
-- While the ECB's APP portfolio will continue to exert downward pressure
on euro area long-term interest rates, "other factors such as economic
fundamentals and the creditworthiness of issuers, as assessed by market
participants, remain key determinants of the levels of bond yields and spreads",
-- The underlying strength of the euro area economy continues to support
the ECB's confidence that the sustained convergence of inflation will proceed as
desired. However, significant monetary policy stimulus is still needed to
support the build-up of domestic price pressures and headline inflation
developments over the medium term.
--MNI Frankfurt Bureau; +49-69-720-146; email: firstname.lastname@example.org
--MNI London Bureau; +44208-865-3829; email: Jason.Webb@marketnews.com