ECB’s Mersch says stimulus should end as soon as possible

Bloomberg

The European Central Bank’s extraordinary stimulus measures are not intended to be permanent and should be withdrawn as soon as possible, Executive Board member Yves Mersch said.
“The size of the purchase program means that will take some time, but a permanent commitment to our bond-buying, for example, would set the wrong incentives for government financing,” Mersch said in a speech in Frankfurt on Thursday. That would be “a development that would ultimately run up against the ban on monetary financing and so be incompatible with our mandate.”
The ECB is set to decide on Dec. 8 whether to prolong its 1.7 trillion-euro ($1.8 trillion) asset-purchase program past the current end-date of March, and with inflation running well below its target, many economists predict an extension. Still, the central bank will also publish revised economic forecasts that run to 2019 for the first time, and Mersch suggested those figures might indicate when the stimulus can start to be wound down.
“It could be that we expect an inflation rate at the 2019 horizon that is very near to our price-stability goal of almost 2 percent,” he said. He also warned against “excessive expectations” for the policy decision.
The euro initially rose after his comments, before paring gains. The single currency was up 0.2 percent at $1.0717 at 11:07 a.m. Frankfurt time.
Euro-area inflation was 0.5 percent in October, according to data published Thursday. The ECB’s last economic projections in September foresaw consumer-price growth averaging 1.6 percent in 2018.
Mersch also reiterated the ECB’s warning that monetary measures alone can’t sustain the currency bloc’s economic recovery, and that political support is needed.
“That includes stronger fiscal policy,” he said. “Only then can our monetary policy normalize. Moreover, above all we need reforms that, for example, allow more flexibility in labor and product markets, and which boost productivity.”