ECB Needs to Prove Inflation-Fighting Mettle, Ex-BOE Deputy Governor Says

  • Hard to get inflation expectations back up once they've fallen
  • Former BOE deputy governor speaks in Bloomberg interview

Former Bank of England Deputy Governor Charlie Bean said the European Central Bank must ensure people are convinced of its readiness to fight inflation risks, even if its policy armory is losing power.

As ECB President Mario Draghi prepares to add more stimulus in the euro area on Thursday, Bean said the central bank can’t afford to lose control of inflation expectations, particularly with interest rates already at record lows.

QuickTake Europe's QE Quandary

“Once inflation expectations have dropped, it’s hard to get them back up,” Bean told Mark Barton in a Bloomberg Television interview on Wednesday. That’s particularly the case when officials are relying on unconventional monetary tools, whose effectiveness is “unproven,” he said.

Options for the ECB including cutting its deposit rate further or expanding its QE program in size or duration. While the central bank’s decision is “not black and white,” according to Bean, policy makers need to show they are ready to do what’s necessary to boost inflation. Consumer-price growth in the 19-nation region was only 0.1 percent in November, compared with the ECB’s goal of just below 2 percent.

“Some of that of course is obviously due to the temporary effects of weak oil prices,” Bean said. “You strip that out, underlying inflation is still below their target. And it is important that the ECB -- that people believe it’s committed to achieving that in the medium term.”

Bean, who was deputy governor for monetary policy at the BOE until June 2014, said measures such as quantitative easing are more effective when markets are dysfunctional.

“How much leverage you can get from them at the moment is an open question,” he said. “But what is really important is that the ECB really shows a commitment to achieve its mandate.”

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