• ECB chief economist sees credibility risk if price goal slips
  • Mustn't let oil-price movements dictate inflation expectations

The European Central Bank mustn’t let a lack of clarity over the future path of the economy prevent policy makers from taking action if needed, Executive Board member Peter Praet said.

“What is essential is that uncertainty does not give rise to indecision,” Praet, who serves as the ECB’s chief economist, said in a speech in Frankfurt on Thursday. “It is remarkable that in a world of uncertainty you have this capacity to decide, and there is a very strong Governing Council behind the decisions that you take.”

Peter Praet
Peter Praet
Photographer: Martin Leissl/Bloomberg

The Frankfurt-based ECB is facing a finely-balanced judgment at its next policy meeting on Dec. 3, where officials need to weigh disappointing inflation against the risk that they could overreact in an economy that’s in a cyclical recovery. Praet said for the second time in a week that he’s concerned the ECB’s credibility will suffer by not meeting its inflation target of just under 2 percent soon enough.

“A central bank cannot allow itself too much discretion over the time horizon when inflation should return to its target,” Praet said. “Our independence rests on the fact that we are accountable, and that means delivering price stability over a horizon that is verifiable by the public.”

Consumer prices in the euro area are stagnating as high unemployment and sluggish growth leave spare capacity in the economy. Declines in oil prices this year have compounded the ECB’s problem, even after it started an unprecedented 1.1 trillion-euro ($1.2 trillion) quantitative-easing program.

Praet argued that policy makers can’t afford to let expectations of future inflation be overly influenced by swings in energy prices.

“We have seen, on occasions, longer-term inflation expectations responding to short-term movements in oil prices,” he said. “That is unacceptable for a central bank, insofar as it implies that people’s expectations of its reaction function have become less certain.”

At the last policy meeting on Oct. 22, ECB President Mario Draghi suggested officials could decide in December to expand QE, or even cut the deposit rate further into negative territory. The rate is currently minus 0.2 percent. Praet said officials are having “rich discussions” and confirmed that more reductions are “part of the toolbox.”

“We have to assess whether, taking the risks relating to our mandate into account, the overall picture in the euro-area economy is one of sufficient speed and momentum in growth and inflation for the ECB to meet its medium-term mandate,” Praet said. Central banks must “be ready to take informed decisions; to act under uncertainty and deliver their mandates,” he said.

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