FRANKFURT Euro zone economic growth may be improving - and European Central Bank policy will reflect this - but inflation remains weak so there is no need to deviate from the policy path already laid out, top ECB policymakers said on Wednesday.
The comments from ECB President Mario Draghi and two of his top lieutenants suggest the bank is going to be extremely cautious about dismantling its massive stimulus program.
Draghi, Vice President Vitor Constancio and chief economist Peter Praet all acknowledged the euro zone's best economic growth run in a decade. But they played down its relevance as underlying inflation remains anemic, wage growth is muted and the slack in the labor market remains sizable.
"We are fully aware, and by the way I would say there's even a unanimous view about economic developments, that the situation is improving, and this will of course be fully reflected in our future decisions," ECB Vice President Vitor Constancio said.
But he also urged caution, arguing that economic output will not reach the currency bloc's potential before the end of next year and that wage growth is not reassuring.
With growth accelerating, conservative countries like Germany have put pressure on the ECB to start winding down its unprecedented stimulus, saying the side effects are starting to outweigh the benefits.
"When we introduced unconventional policy instruments,... we were aware that those new instruments could result in somewhat more pronounced side effects than conventional instruments," Draghi said separately. "These side effects have remained contained."
"Our current assessment of the side effects suggest therefore that there is no reason to deviate from the indications we have been consistently providing in the introductory statement to our press conferences," Draghi added.
The ECB next meets on June 8 and markets expect the bank to revise its negative view on the economy to say the risks to growth are balanced.
It is also expected to discuss whether to remove its so-called easing bias, a signal that it is still ready to cut rates or raise the volume of its asset buys, if needed.
Real estate bubbles and weak bank profitability are among the key potential side effects of ultra easy monetary policy, but the ECB's biannual stability report dismissed concerns over such problems.
The bank said that while there may be pockets of inflated house prices, particularly around capital cities, there was no general bubble.
It also warned that debt sustainability concerns have risen, partly on a risk that debt markets reprice, but noted that monetary policy targets inflation and not stability, so such concerns must be handled with other tools.
"Underlying inflation pressures still give scant indications of a convincing upward trend as domestic cost pressures, notably wage growth, remain subdued," Praet, considered a dove like Draghi and Constancio, told a conference in Sofia.
The three policymakers are notably more cautious than fellow board member Benoit Coeure, who recently argued that the bank should not wait too long before paring back stimulus once it is convinced that inflation has recovered.
The ECB aims for inflation at just below 2 percent but has undershot its target for years and does not expect to hit its objective until 2019.
"I think that when we look at the history of monetary policy in Europe and outside, we have to be cautious about the premature withdrawal of stimulus, and if anything, it's preferable to err in the other direction," Constancio said.
(Additioanl reporting by Tsvetelia Tsolova in Sofia, editing by Ed Osmond and Hugh Lawson)