Forget About an ECB Taper -- Money Talk

        By Alen Mattich
        The European Central Bank has barely started its EUR1 trillion asset purchase program and already there are mutterings about how it might need to be wound down early.
        There are signs of a solid pick-up in the eurozone economy--the latest industrial production data were strong and bullish purchasing managers' surveys suggest more of the same over the coming months. At the same time, prices data and surveys suggest a possible bottoming of deflationary pressures across the region.
        Throw in rising bank lending as firms turn more bullish on their growth prospects and banks become more open handed with loans and the scene seems to be set for a virtuous circle. In some economies, the worry is that there might be a bit too much of that virtue: the Bundesbank has begun to worry about over easy ECB monetary policy inflating asset bubbles in some urban centers.
        On the other side of the equation there are clear market distortions. Yields on an ever larger proportion of eurozone sovereign debt have been driven down to where they're now negative. The yield compression has spread to junk debt where the reward for taking on risk is paltry and fading. And now there's talk that banks will have to pay mortgage borrowers interest rather than the other way round.
        ECB President Mario Draghi is likely to bat away these concerns at Wednesday's press conference. The ECB, he'll most likely say, is determined to stick to its schedule of EUR60 billion in monthly asset purchases until September 2016. No, the eurozone won't run out of debt for the central bank to buy. And regulators can handle any market distortions that threaten systemically dangerous financial risks.
        Only a clear drop in the region's economic spare capacity--for which read unemployment--and a return of inflation expectations to the ECB's medium-term target of just under 2% annual consumer price rises will cause the central bank to reconsider its policy, Mr. Draghi is likely to say. And neither is quite on the cards.
        With fiscal policy still tight across much of the region, Mr. Draghi and his central bank colleagues will be worried that a premature end to QE would immediately throw the region's economy into reverse. The recovery might be healing, but the rebound is unlikely to be self-sustaining as long as the global economy is subdued--there have been clear signs of slowdown in China while the U.S.'s economic data have been disappointing lately--and eurozone domestic demand is still lackluster.
        What he's unlikely to mention is that the flip side of the ECB's policy--which has had the effect of driving down the euro, thus boosting imported inflation and making the region's firms more competitive--has been a stronger dollar and a softer U.S. economy. The longer the ECB maintains this policy, the more likely it forces the Federal Reserve to hold off on its first interest rate hike. Which, in turn, is bound to weaken the dollar and erode the eurozone's advantage. And is another reason for the ECB to keep its foot on the monetary accelerator, notwithstanding some of the recent good news.
        This is an opinion column by Alen Mattich, who has been a columnist for Dow Jones for more than a decade. Write to him at alen.mattich@dowjones.com or on Twitter @AlenMattich
        (END) Dow Jones Newswires

        April 14, 2015 09:37 ET (13:37 GMT)

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