The European Central Bank should be cautious if it withdraws from emergency stimulus, even if the economy returns from a pandemic, as expected, says outgoing policymaker Vita Vasiliuska.
The board member and president of the Central Bank of Lithuania, who resigns next month, said in an interview that the European Central Bank should very soon benefit from past experience of stronger action. This means a gradual return to standard monetary instruments only.
He predicted that even after the return of inflation to the previous epidemic, policymakers would have to maintain quantitative easing “for a long time.”
“I do not think we can afford to make very drastic changes to our monetary policy, especially given our historical experience,” Vasilius said on Monday. “In a transitional situation, it would be better to live a little longer.”
European Central Bank officials have had to return over the last decade after the premature suspension or withdrawal of monetary support. They stopped buying bonds at the end of 2018, just to resume buying during the year as the economy deteriorated, and were forced to reverse two interest rate increases in 2011.
The extraordinary pandemic emergency purchase program of € 1.85 trillion (US $ 2.2 trillion) is expected to continue for at least another year, while the old quantitative easing plan introduced in 2015 is open – only to progress in returning inflation to the euro area in a more sustainable way. 2%.
“I don’t think maintaining the stimulus for too long is too risky compared to overreacting to the withdrawal of the stimulus,” Vasilyusk said, adding that he did not expect any decision on how to get rid of the crisis program before the fall.
The 47-year-old man ran the Central Bank of Lithuania for ten years and became a policy-maker of the European Central Bank in 2015, when his country joined the eurozone. He joins the Board of the International Monetary Fund as a representative in the Baltic region and Northern Europe.
The European Central Bank is currently accelerating bond purchases to stem the rise in borrowing costs, reflecting the growing gap between the eurozone economies and the United States. The recovery in the United States is driven by the rapid pace of vaccination and huge financial support, while the failure of the vaccine has led to extended restrictions in the eurozone.
Central banks across the region have bought an average of € 20 billion a week in debt over the past two weeks to maintain favorable financial conditions for governments, businesses and households, and Vasiliauskas said investors should expect this pace to continue.
“Right now, I don’t see the need to change our course,” he said.
While acknowledging that the bloc is struggling to overcome the crisis, Vasilyuskas said that the European Central Bank’s latest forecast for economic recovery, which begins next quarter, remains valid.
IFC staff expected the economies of 19 countries to shrink in the first quarter this month, but to grow by at least 1.3% over the next three periods. They see a 4% increase for the whole year, although this is not enough to offset last year’s 6.6% decrease.
“I am optimistic about the balance of risks, what we can see and what we can expect in the second half of this year,” the governor said. “The outlook reflects reality – I wouldn’t say she’s too pessimistic or optimistic.”
He also said, echoing recent interviews with fellow board members Martin Kazak (Latvia and Slovakia) Peter Kazimir, that the looming recovery means that the European Central Bank will not keep borrowing costs at current levels forever.
He said: “Some changes in financial conditions are very normal if you see a positive change in the economic outlook.” You cannot avoid an increase in profits and other rates. The point is to understand whether this is a natural consequence of economic development or whether something is wrong. “
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