ECB to Keep Up Forceful Action on Price Risks, Praet Says

  • Praet concerned inflation expectations to settle at low level
  • ECB Executive Board member gives speech at event in Rome

The European Central Bank will keep acting “forcefully,” if needed, to counter the risk of low inflation in the euro area becoming entrenched, Executive Board member Peter Praet said.

“The prolonged period of low inflation we are in today has increased the risks that inflation misses might become persistent, which would be deeply damaging for the economy,” Praet said in a speech in Rome on Monday. “This is why we have reacted so forcefully to secure our objective -- and will continue to do so in the future if necessary.”

The ECB announced the expansion of bond purchases to 80 billion euros ($91 billion) per month in March, as part of a renewed push to revive inflation that also includes the acquisition of corporate debt for the first time. Price growth has been below the central bank’s goal of just under 2 percent for three years and is projected to remain near zero this year amid an oil slump.

“The risk was that, unlike in previous episodes of sharp oil price reversals, inflation expectations might lose their resilience, due to accumulating evidence that the return of headline inflation to our objective had been repeatedly put back,” Praet said in the speech. “Without further decisive policy action, sized to a scale appropriate to arrest the process, a downward re-anchoring towards a lower inflation rate could not have been ruled out.”

Policy Mix

As the ECB’s chief economist, Praet is underscoring the message he delivered on March 18, when he said that interest rates can fall even lower if need be, and that the central bank is ready to step up stimulus efforts if price gains don’t respond. He countered ECB critics who have suggested the central bank shouldn’t over-extend its own policies while governments do little to spur growth.

“The crisis has proven that ensuring price stability is not sufficient for sustainable growth,” he said on Monday. “It is only an enabling condition and other policies must also play their part. Still, the need for a superior policy mix is no excuse for central banks to be passive when their mandates are under threat.”

Praet’s comments underline the stance of ECB President Mario Draghi, who has pushed for pre-emptive, decisive action on price risks without waiting for actual deflation to materialize, according to Frederik Ducrozet, senior European economist at Banque Pictet & Cie SA in Geneva.

Surprisingly, “Praet did not rule out the risk of the ECB being forced to use unconventional measures ‘more frequently’ in the future in order to make sure expectations remain well anchored,” Ducrozet said in an e-mailed response to questions. “You would expect ECB officials to sound more upbeat about medium-term prospects while pushing governments and EU institutions to do their part in supporting aggregate demand.”

Talking to reporters later Monday, Praet said: “A central bank cannot remain passive: if these downside risks materialize, we are committed to our mandate and we will continue to act.”

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