The European Central Bank’s pledge to keep its benchmark interest rate on hold for an “extended period” isn’t aimed at driving up inflation, said Frank Smets, the ECB’s director general for research.
“This is not a promise to be irresponsible, not a promise to generate higher inflation,” Smets told the Federal Reserve Bank of Kansas City’s annual symposium in Jackson Hole, Wyoming. “Instead, the forward guidance is really meant to clarify both the assessment of the ECB of the current subdued outlook for inflation” and inform investors about what it’s looking for to guide its decision making.
President Mario Draghi began issuing guidance in July to quell an increase in financial-market borrowing costs and protect an economic recovery that only began in the last quarter.
On whether European rates can decouple from the U.S. when the Federal Reserve unwinds stimulus, Smets said he believed the ECB could steer long-term interest rates through standard policy and keep them “relatively low” when adjusted for inflation, even if the equivalent rates are climbing in the U.S.
He said forward guidance may prove more effective in the euro area than U.S.-style asset purchases given banks have greater influence than markets in the European economy.
When it comes time to exit its stimulus, Smets said the ECB’s “exit is almost endogenous” because banks will return emergency funds they received and the balance sheet will narrow.