ECB to take more action if needed to counter risk of low inflation

The European Central Bank will keep acting “forcefully”, if needed, to counter the risk of low inflation in the eurozone becoming entrenched, executive board member Peter Praet said yesterday.

“The prolonged period of low inflation we are in today has increased the risks that inflation misses might become persistent, which would be deeply damaging for the economy,” Mr Praet said in a speech in Rome.

“This is why we have reacted so forcefully to secure our objective and will continue to do so in the future if necessary.”

The ECB announced the expansion of bond purchases to €80bn per month in March, as part of a renewed push to revive inflation that also includes the acquisition of corporate debt for the first time.

Price growth has been below the central bank’s goal of just under 2% for three years and is projected to remain near zero this year amid an oil slump.

Meanwhile, sterling bounced almost half a percent against the euro and dollar yesterday, with the conviction of some investors that June’s Brexit referendum is reasonably priced in helping cool concerns over a record current account gap.

The pound had fallen to a more than two-year low against a trade-weighted basket in early trade, down around 2% since British current account numbers last Wednesday showed the deficit surging to 7% of national output at the end of last year.

As the ECB’s chief economist, Mr Praet is underscoring the message he delivered on March 18, when he said interest rates can fall even lower if need be, and that the central bank is ready to step up stimulus efforts if price gains do not respond. 

He countered ECB critics who have suggested the central bank shouldn’t over-extend its own policies while governments do little to spur growth.

“The crisis has proven that ensuring price stability is not sufficient for sustainable growth. It is only an enabling condition and other policies must also play their part,” Mr Praet said yesterday.

“Still, the need for a superior policy mix is no excuse for central banks to be passive when their mandates are under threat.”

His comments underline the stance of ECB president Mario Draghi, who has pushed for pre-emptive, decisive action on price risks without waiting for actual deflation to materialise, according to Frederik Ducrozet, senior European economist at Banque Pictet & Cie in Geneva.

Talking to reporters yesterday, Mr Praet said: “A central bank cannot remain passive: if these downside risks materialise, we are committed to our mandate and we will continue to act.”


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