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ECB Channels Trichet’s Strong Vigilance to Signal Easing

Executive Board Member Yves Mersch
Executive Board member Yves Mersch said, “Draghi only said, in his own way, what Mr. Trichet used to say with ‘strong vigilance’. We never precommit unconditionally, but there is a row of possibilities.” Photographer: Hannelore Foerster/Getty Images

The European Central Bank is preparing multiple measures against too-low inflation that could be used as soon as next month, policy makers said.

The central bank is working “at high speed” on a range of policy instruments, Executive Board member Yves Mersch said today. When ECB President Mario Draghi commented on May 8 that officials are “comfortable” with taking action at their next interest-rate meeting, he was using the methods of his predecessor, Jean-Claude Trichet, to tell investors that measures are near, Mersch said.

“We never precommit unconditionally, but there is a row of possibilities,” he said in Berlin. “Draghi only said, in his own way, what Mr. Trichet used to say with ‘strong vigilance’.”

The ECB is trying to revive inflation to solidify an economic recovery after a recession and debt crisis that almost splintered the currency bloc. While Draghi kept rates at a record low last week, he said officials are “dissatisfied” with the outlook for price growth and policies from a cut in the benchmark interest rate to a negative deposit rate and asset purchases have been discussed.

Trichet, who headed the Frankfurt-based ECB from 2003 to 2011, typically used the phrase “strong vigilance” to signal interest-rate increases a month in advance. He didn’t deploy the language before a rate cut.

Package of Measures

The ECB next meets to set monetary policy on June 5, when it will also present revised macroeconomic forecasts through 2016. Those may show the medium-term outlook for inflation has deteriorated enough to warrant action. Officials may also decide to steer against strength in the euro, which they have said depresses inflation by curbing the price of imports.

“We could offer more long-term loans to banks, possibly against conditions,” Executive Board member Peter Praet said in an interview with Die Zeit published today. “We could cut interest rates once again. A combination of measures is also thinkable.”

Concern that the economy will falter was reinforced yesterday by a bigger-than-expected drop in investor confidence in Germany, the region’s biggest economy, to the lowest level since January 2013.

Germany’s Bundesbank, which has railed against some ECB policy instruments in the past, is in general supportive of the need for action and is open to a package of measures, according to two people with knowledge of the matter. Still, such support isn’t automatic, the people said, and depends on the outlook for price stability.

Bundesbank Vigilance

“On the medium term inflation outlook, we do not believe the ECB staff projections will be lowered sufficiently to warrant large scale broad-based asset purchases,” said Anatoli Annenkov, senior European economist at Societe Generale SA in London. “Many commentators, including ourselves, now look for a negative deposit rate at the June meeting.”

Inflation in the euro area has stuck at less than half the ECB’s goal of just under 2 percent since October. The rate was 0.7 percent last month after slowing to 0.5 percent in March, the weakest pace in more than four years. Final April inflation data will be published tomorrow, along with the initial estimate of first-quarter gross domestic product. May inflation will be published on June 3.

“What exactly will happen, that’s a decision that we will take at the next council meeting,” Mersch said today.

Euro Strength

Bundesbank President Jens Weidmann will also speak in Berlin today, and ECB Vice President Vitor Constancio will speak in the city tomorrow. Mersch will talk in Krakow, Poland, tomorrow and Executive Board member Benoit Coeure is in Warsaw on May 16.

Policy makers have said charging banks to keep cash at the ECB, by reducing the deposit rate from the current level of zero, is the main tool for counteracting strength in the single currency. The euro has climbed 7.4 percent against the dollar since early July. The gain exerts significant downward pressure on inflation, Mersch and Praet said.

“In the context of the very low inflation rate in the euro area an appreciation is a problem, because a stronger euro cheapens imports and further depresses the inflation rate,” Praet said. “Negative interest rates are a possible part of such a combination of measures.”

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