Wed, Oct 28, 2015 - Page 15 News List

‘No taboos’ for ECB tackling weak inflation: economist

AFP, FRANKFURT

There are “no taboos” for the European Central Bank (ECB) when it comes to finding ways to push up the chronically low level of inflation in the eurozone, ECB lead economist Peter Praet said in an interview.

“There are no taboos,” Praet said, pointing among other issues on the table to the bank’s contested bond-purchase program, known as quantitative easing (QE).

There is a growing risk that inflation in the eurozone will not return to levels conducive to healthy economic growth by 2017, as initially forecast, Praet said.

The central bank is having an “in-depth, 360-degrees reflection” on the measures needed to push inflation back to just below 2 percent, Praet added.

“We are in a situation where the timeframe for achieving the inflation objective risks once again to be moved back,” the Belgian economist said. “We will assess this in December, notably in light of the new macroeconomic staff projections.”

His comments came just days after ECB President Mario Draghi signaled that the central bank could be ready to ramp up its contested QE program to boost inflation in the 19 nations that share the euro.

At the bank’s regular policy meeting last week, Draghi said the bank was ready to use all monetary policy ammunition at its disposal and would re-examine its policy stance in December.

“The governing council has given a very strong message: It is ready to draw the consequences of its assessment of the monetary policy stance,” Praet said. “The president has asked the teams to re-examine the toolbox and to have an in-depth, 360-degrees reflection.”

In March, the bank launched a scheme to buy more than 1.1 trillion euros (US$1.22 trillion) in sovereign bonds at a rate of 60 billion euros per month at least until September next year to boost inflation, which slowed to minus-0.1 percent last month. The ECB has already slashed its key interest rates to historically low levels — cutting the bottom rate, known as the deposit rate, to minus-0.20 percent, bringing interest rates into negative territory for the first time.

That means banks now have to pay to park cash overnight at the ECB’s deposit facility.

Draghi, who had previously said that eurozone interest rates had reached their lower bound, last week said a possible further reduction of the deposit rate was back on the table.

Praet said that the ECB was examining its own experience and that of other central banks with negative interest rates.

“The impact on the economy is positive. Regarding banks, we can see that there is a negative impact on unit margins, but banks also benefit from the impact on the economy in general,” he said.

The ECB is worried about the strength and the persistance of factors putting downward pressure on inflation, such as falling oil prices and economic slowdown in China.

However, the risk of deflation — which is a dangerous downward spiral of falling prices — is “very small,” Praet said.

“However, the risk of seeping into a low-growth and low-inflation regime is real,” he said.

While falling prices might appear to be good for consumers, they can be poisonous to the economy. The fear is that deflation could become entrenched if consumers delay purchases in the hope of lower prices later, which in turn prompts companies to hold off investment, creating a vicious circle of falling demand and fewer jobs.

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