2 of Europe's top central bankers dropped hints that it might be time to start removing unprecedented coronavirus stimulus packages

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  • Chief economists at the Bank of England and the European Central Bank are indicating it might be time to retreat from injecting massive amounts of economic stimulus into economies.
  • Business indicators seem to suggest that global economies and the UK have recovered sooner and “materially faster” than expected, according to Andy Haldane.
  • ECB chief economist Philip Lane has a more cautious outlook. He said that although it might be too soon to tell what the economic trajectory will look like, it might be time to rein in monetary policy over the next few months.
  • In dealing with negative shocks, Lane said the European Governing Council in the past has “pulled back, we did shrink the asset purchase program, and we did bring asset purchases to zero when we thought we could.”
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Top policymakers in Europe this week seemed to indicate it might be time to rein in the flow of money meant to protect economies from an outright collapse.

While assessing the path to recovery, the Bank of England’s chief economist Andy Haldane said this week that the UK economy has bounced back sharply in comparison to what was originally expected.

He pinned that down to indicators such as closely-watched business surveys. He also tied in strong consumer spending in as a sign that households are now making use of the money they were forced to save during the start of the pandemic.

Haldane seemed further optimistic that the opening up of pubs, restaurants, hotels, cinemas, and other outlets on Saturday will do more to propel consumer spending, and highlighted reports that suggest advance bookings for these services are “brisk.”

Last month the Bank of England decided to add another £100 billion ($US125 billion) of monetary stimulus to boost financial markets impacted by the pandemic, a decision ratified by an 8-1 vote by the monetary policy committee.

The only dissenter was Haldane.

To explain his opposition he said: “I judged the upside news in demand since our previous meeting in May to have outweighed the negative news to the UK’s economic outlook.”

He wanted to maintain the monetary stance rather than loosen it further.

He noted there is a possibility unemployment in the UK could get worse in the second half of the year as the furlough scheme narrows, warranting more action. But as this currently remains uncertain, it may not be a top-of-list priority.

Philip Lane, the chief economist at the European Central Bank, is more discreet about recovery.

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In a recent interview with Reuters, Lane pointed out that the European economy will see a long period of positive data compared to drastic lows seen in April.

“Whether it grows at the same speed, or we get an initial bounce and then it levels off it’s not going to be so easy for us, you or the market to navigate or extract useful signals from the data,” Lane said.

He said that even in case of a severe scenario, inflation in Europe would not go negative. But that does not say much about what it may look like in the medium term.

In terms of negative shocks to the economy, Lane believes they are only temporary.

“My view is that some of those negative shocks cannot be sustained, some of them have the seeds of their own demise,” he said. “I don’t see the world as always having these negative shocks and this is why central banks have the ability to reverse course.”

Lane warned it may be too early to tell whether Europe’s economies are seeing a solid footing, and that they may only return to pre-crisis levels by 2022.

The few weeks seeing an initial bounce does not serve as a good guide for what may happen in winter.

However, both Haldane and Lane agree that it is time for the central banks to pull back and wait for further data to lead the way for the next steps.

Over his five-year tenure at the Governing Council, Lane said the central bank had “pulled back, we did shrink the asset purchase program, and we did bring asset purchases to zero when we thought we could.”

Both central bankers are aiming to wait before wading through “noisy data” and hopefully extract useful signals from the post-crisis economy to make next moves.

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