Off The Wire
ECB minutes show deep rift over policy as Draghi era closes
FRANKFURT (Reuters) - European Central Bank policymakers were deeply divided last month over reviving bond purchases, according to minutes of their meeting that show a rift within the euro zone’s most important institution deepening ahead of a change of leadership.
The unprecedented split, which saw more than a third of policymakers, including the central bank chiefs of the bloc’s biggest countries, France and Germany, oppose the new bond purchases, now threatens the effectiveness of policy.
Facing a protracted slowdown, the ECB decided last month to cut interest rates deeper into negative territory and to buy bonds indefinitely, with the aim of cutting borrowing costs to stimulate investment and growth.
But the push back from some conservative members of the ECB Governing Council, which has since spilled into the public debate, raises questions about the bank’s resolve and the ability of policymakers to work together.
The minutes of the Sept. 12 meeting, published on Thursday, are the latest evidence of division at the top of the ECB.
They follow a long list of frustrated statements from policy hawks who feel they have been strong-armed into a measure that ties the hands of the ECB well past the end this month of Mario Draghi’s eight-year term as the bank’s chief.
“Judging from the latest series of news reports, press statements, interviews and rumors, the ECB seems to be in the middle of a War of the Roses,” ING economist Carsten Brzeski said, referring to the 15th century power struggles in England.
“As entertaining as the current divisions at the ECB might be, it harms the bank’s credibility and consequently its effectiveness,” Brzeski added.
Opponents of restarting the quantitative easing (QE) program that was shuttered late last year said that open-ended bond-buying could force the ECB to breach self-imposed purchase limits and put it at risk of a fresh legal challenge.
“This would exhaust the purchasable universe and call into question the program limits, which were considered important to ensure that the boundary between monetary policy and fiscal policy were not blurred,” the account of the meeting showed.
The Financial Times reported on Thursday that the monetary policy committee, which prepares options for policymakers, had opposed the fresh bond purchases, while the legal committee pointed to the danger of breaching the thresholds.
While committee recommendations are not binding, opposition from both policymakers and staff at the euro zone’s 19 national central banks highlights the divisions within an institution that normally strives for consensus.
Two of six members of the ECB’s executive board opposed the bond purchases while a third expressed reservations about the rate cut. Sabine Lautenschlaeger, Germany’s representative on the board, has since quit, blaming her “situation” at the bank.
The ECB can buy up to a third of each member country’s debt and it is getting close to this threshold in Germany, indicating that incoming ECB chief Christine Lagarde will have little time before she must contemplate amending the bank’s own rules.
Opponents of more asset purchases also said they would not be effective given already low bond yields, and that such a tool should be reserved for emergencies, the accounts showed.
The accounts did not specify how much room the ECB had to buy more bonds but said there was a “significant” period before the limits would be hit.
The document also showed that some policymakers were ready to support a bigger rate cut of 20 basis points if the stimulus package excluded fresh bond purchases.
Concerns were expressed about the two-tier deposit rate, intended to shield banks from the ECB’s penalty charge on up to six times their mandatory reserves.
But all policymakers agreed on the need for more stimulus given weak growth and stubbornly low inflation expectations, the minutes showed, and the bond purchases were eventually supported by a “clear majority”.
Tiering had a “majority” while there was a “very large majority” for the rate cut.
Editing by Catherine Evans