The European Central Bank (ECB) could further slash its super-low interest rates if the economic outlook worsens, its chief economist Peter Praet said yesterday, adding that the bank still has ammunition to fight deflation.
“We have not reached the physical lower bound” on rates, Praet told Italian daily La Repubblica in remarks released by the Frankfurt-based ECB.
“If new negative shocks should worsen the outlook, or if financing conditions should not adjust in the direction and to the extent that is necessary to boost the economy and inflation, a rate reduction remains in our armory,” he said.
ECB President Mario Draghi suggested otherwise last week.
Draghi surprised investors after the ECB’s policy decision on Thursday last week, when he said he did not think more rate cuts would be needed. He told EU leaders in Brussels that the central bank had “no alternative” to monetary-policy action that has taken the deposit rate to a record-low minus-0.4 percent, according to two officials familiar with deliberations.
In a bid to revitalize a lackluster economy and boost chronically low inflation, the ECB last week slashed already record-low interest rates, prepared to pump massive new sums into the banking system and, for the first time, said it would start buying corporate bonds.
The unprecedented package “should bring us close to the 2 percent [inflation] target at the end of 2018,” Praet said.
The ECB has battled for years to push inflation back up to levels it believes are consistent with healthy economic growth, to little avail.
In fact, eurozone inflation turned negative last month, as consumer prices declined by 0.2 percent.
Underlining the ECB’s determination, Praet did not rule out deploying the drastic tactic of simply printing money and giving it away — a measure dubbed “helicopter money.”
“The question is if and when is it opportune to make recourse to that sort of instrument which is really an extreme sort of instrument,” the economist said. “There are other things you can theoretically do.”
Additional reporting by Bloomberg
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