Rogoff Sees Need for Stronger ECB Action Amid Limited QE Effect

Central Banks Need to Think About Negative Rates: Rogoff
  • Draghi will probably press ahead with more asset purchases
  • ECB awaiting countries' structural reforms to support economy

The European Central Bank may need “more radical” measures to supplement its bond purchases as it seeks to stoke inflation, Harvard Professor Kenneth Rogoff said.

Since the ECB started quantitative easing 10 months ago, prices within the 19-country bloc have barely risen and the time frame for returning inflation to the central bank’s goal of just under 2 percent has twice been extended. That raises the question of whether ECB President Mario Draghi and his colleagues are using the right instruments, Rogoff said.

“QE is of limited effectiveness,” the professor of economics and public policy told Francine Lacqua and Tom Keene on Bloomberg Television’s “Surveillance” program in Davos, Switzerland, on Wednesday. At the same time, Draghi has “limited tools,” he said.

With interest rates at record lows and asset purchases pledged to total at least 1.5 trillion euros ($1.6 trillion), Draghi has repeatedly called on euro-area governments to do their part in sustaining growth and making the region’s economy more competitive. Rogoff said he wasn’t sure structural reforms will materialize, leaving it to the ECB president to act.

“He can do more QE, he probably will,” Rogoff said. “He’ll probably press ahead, but unless he can change more radically his instruments, it’s not easy to do.”

On Dec. 3, Draghi cut the deposit rate to minus 0.3 percent, extended asset purchases to at least March 2017 and pledged to reinvest the principal of maturing bonds to prevent low price growth from becoming entrenched. A further drop in the price of crude oil since then has already cast a shadow over the ECB’s most recent forecast of inflation accelerating to an average of 1 percent this year and 1.6 percent in 2017.

The ECB will publish updated projections at its March meeting, when any downgrades could provide the justification for more action. More than 60 percent of economists in a survey published by Bloomberg on Jan. 18 predicted the ECB president will announce more stimulus this year. That’s up from 40 percent in December.

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