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Draghi Should Use QE Only If Deflation Looms, ZEW’s Fuest Says

The European Central Bank should only engage in broad-based asset purchases if it sees a risk of falling prices in the euro area, said Clemens Fuest, president of the ZEW Center for European Economic Research.

“Quantitative easing should be a reaction if there was the real threat of deflation, a deflationary spiral,” Fuest said in Frankfurt yesterday. “It shouldn’t be designed as an instrument to reduce the risks for investors in government bonds.”

ECB President Mario Draghi announced a range of measures this month to boost inflation that is running at about a quarter of the central bank’s goal. The package includes a negative deposit rate and long-term loans to banks with the condition that they lend the money on to companies and households.

“Monetary policy is reaching its limits,” Fuest said, adding that QE is the last option in the ECB’s toolkit.

Inflation in the 18-nation currency bloc slowed to 0.5 percent in May, compared with the ECB’s target of just under 2 percent, and Draghi said on June 5 that “this outcome was lower than expected.” While the ECB doesn’t currently see a negative spiral of prices falling and households postponing their spending plans, it would act again to address such a risk if need be, he said.

Initial consumer-price data for this month will be published on June 30 by the European Union’s statistics office in Luxembourg.

“I don’t regard the risk of deflation in the euro zone as particularly high,” Fuest said. “Low inflation is due to the adjustment process in the periphery, which has been absolutely necessary.”

ZEW is an independent research institute based in Mannheim, Germany. Its survey of investor and analyst expectations in the country showed confidence dropped for a sixth month in June even after the ECB stimulus package.

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