ECB's Nowotny urges gradual approach as QE decision nears

European Central Bank (ECB) Governing Council member and OeNB governor Ewald Nowotny addresses a news conference in Vienna, Austria, June 9, 2017. REUTERS/Leonhard Foeger

VIENNA (Reuters) - Austrian central bank chief Ewald Nowotny has said the European Central Bank should tighten monetary policy gently, avoiding abrupt changes, three weeks before the policymakers decide whether to slow asset buys from next year.

With the ECB’s current 2.3 trillion euro bond purchase program due to end in December, ECB policymakers are likely to use their meeting on Oct. 26 to debate the merits of either extending the scheme for a relatively long period but with smaller monthly purchases, or retaining bigger monthly purchases, but for a shorter period.

“We are aiming for the prospect of a cautious normalization,” Nowotny, who sits on the ECB’s Governing Council, said in a speech on Wednesday at a conference on financial supervision. “Caution means not hitting the brakes abruptly, but slowly taking your foot off the pedal.”

Nowotny’s comments echoed remarks last month by his German counterpart, ECB hawk Jens Weidmann, who said that, with the threat of euro zone deflation largely gone, the justification for the ECB’s massive asset purchase scheme is no longer there and policymakers should ease up on stimulus.

Nowotny was not as specific but said that the ECB’s target of inflation just below 2 percent should be seen only as a medium-term objective. Inflation has remained well below that target and Nowotny said there was a debate among policymakers about whether we were now in a long period of low inflation.

“From my own experience, I know that it is not so easy to explain to the public why an inflation rate of 1.5 percent is so much worse than an inflation rate of 1.9 percent,” he said.

“Not only with cars but also with central banks, there is the problem of braking distance - and therefore I think it is wise to drive at a safe distance, but to react quickly to problems as they arise.”

Reporting by Francois Murphy; Editing by Kevin Liffey