ECB Official Warns About Impact of Extending Bond-Buying Programs

By Tom Fairless Features Dow Jones Newswires

Central banks risk destabilizing the financial system if they extend bond-buying programs for too long, a top European Central Bank official warned Thursday.

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The comments -- just as the ECB prepares to decide the fate of its own asset-purchase program -- underline differences of opinion within the central bank over how quickly to withdraw its sweeping stimulus measures as the eurozone economy picks up.

Benoît Coeuré, who sits on the ECB's six-member executive board, said central banks may need to turn more frequently to unconventional policy tools such as asset purchases in the future, as weak productivity and aging societies weigh on economic growth.

"In these circumstances, we need to be mindful of risks to financial stability," Mr. Coeuré said in a speech at the Peterson Institute.

"A too protracted period of asset purchases, for example, may cause financial imbalances to build up with potentially adverse consequences for price stability."

The ECB is preparing to decide how to scale down its EUR60 billion-a-month bond-buying program, known as quantitative easing, as the region's economy accelerates. The program is currently due to run at least through December.

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Peter Praet, the ECB's chief economist, suggested recently the program might be extended for a long period, perhaps nine months or more. He argues the bank should be patient because it has made insufficient progress toward its goal of pushing inflation close to 2%.

The International Monetary Fund also urged the ECB this week to be cautious about withdrawing its monetary stimulus, urging policy makers to wait for clear signs that inflation has picked up.

But Mr. Coeuré suggested such an approach could be risky. "It is hard to believe that central banks keeping very large balance sheets for a considerable amount of time will not have an impact on financial intermediation," he said.

He also warned that the negative interest rates introduced by the ECB in mid-2014 could hurt banks' profits over time "despite being extremely effective in complementing other nonconventional monetary policy instruments."

Earlier Thursday, ECB President Mario Draghi described the bank's experiment with subzero rates as "a success."

"We haven't seen the distortions that people were foreseeing," Mr. Draghi said at the same event in Washington. "We haven't seen bank profitability going down; in fact it is going up."

Write to Tom Fairless at tom.fairless@wsj.com

(END) Dow Jones Newswires

October 12, 2017 17:36 ET (21:36 GMT)