"The ECB Needs to Adopt Careful Expectation Management Practices"

Comment

The European Central Bank (ECB) has decided to leave its key interest rates unchanged and to continue its bond-purchase programme as planned until the end of the year. Professor Friedrich Heinemann, head of the ZEW Research Department "Corporate Taxation and Public Finance" at the Centre for European Economic Research (ZEW), comments on the ECB's decision.

"The ECB does well to not adopt hasty measures as this may cause a stir in the markets. The ECB will now have to continue its asset purchase programme until the end of the year, according to plan. Otherwise, uncertainty in the markets would be the result. What is urgently needed, however, is a clear perspective for 2018 with a realistic strategy to taper purchases of government bonds.

Just like quitting drugs, the phasing out of monetary easing measures is likely to cause withdrawal symptoms at the bond markets – even panic attacks are conceivable. This is why the ECB now needs to adopt careful expectation management practices. In this respect, ECB President Mario Draghi has remained too vague.

There is also a striking asymmetry that should be viewed in a critical light. When oil prices were on the decline, the ECB hardly recurred to the falling energy prices to relativize the low inflation rate. Now that oil prices are high, ECB officials are trying to minimise the inflation increase and justify their lack of determination by playing the oil price card. This could adversely affect the ECB's reputation as it creates the impression that – with respect to the target rate – the ECB is more tolerant towards upward deviations than towards downward deviations."

For further information please contact

Prof. Dr. Friedrich Heinemann, Phone +49(0)621/1235-149, E-mail heinemann@zew.de