Praet Says ECB Rates Can Still Fall If Shocks Worsen Outlook

Updated on
  • Central bank's chief economist says recovery remains fragile
  • Signals he expects British voters to opt to remain in EU

The European Central Bank still has room to cut interest rates should the euro area’s economic recovery falter, Executive Board member Peter Praet said.

“We have not reached the physical lower bound,” Praet, who is also the ECB’s chief economist, said in an interview with La Repubblica published Friday. “If new negative shocks should worsen the outlook or if financing conditions should not adjust in the direction and to the extent that is necessary to boost the economy and inflation, a rate reduction remains in our armory.”

Peter Praet

Photographer: Martin Leissl/Bloomberg

President Mario Draghi surprised investors after the ECB’s March 10 policy decision, sending the euro higher, when he said he didn’t think more rate cuts would be needed. He told European Union leaders in Brussels on Thursday that the central bank had “no alternative” to monetary-policy action that has taken the deposit rate to a record-low minus 0.4 percent, according to two officials familiar with deliberations.

“The ECB will want to see the effect of those new measures that it put in place in March,” said Ben May, an economist at Oxford Economics Ltd. in London, who sees Praet’s comments as a signal that additional action is possible but not imminent. “What they’re trying to signal to the markets is that they’re not done.”

As well as cutting its deposit rate by 10 basis points, the Frankfurt-based ECB decided last week to increase bond purchases to 80 billion euros ($90 billion) a month from 60 billion euros currently, and added corporate debt to the program. It also announced a targeted-lending program known as a TLTRO that could see banks paid to take central-bank cash and lend it to the real economy.

A Bloomberg survey before the decision showed economists saw the lower bound at minus 0.5 percent. Deeper rate cuts risk hurting bank profitability to the extent that they pull back on credit to companies and households.

Praet said that the package agreed “makes sense from an economic point of view,” and must remain in place until inflation is back on a sustainable path toward the target of just under two percent. “It must be sustainable. We are not yet there.”

‘Brexit’ Debate

He reiterated the ECB’s view that its loose policy must be accompanied by structural reforms implemented by governments. Draghi made the same point toreporters after the EU summit this week.

“I made clear that even though monetary policy has been really the only policy driving the recovery in the last few years, it cannot address some basic structural weaknesses of the euro-zone economy,” Draghi said.

Praet also dipped into the debate over British membership in the European Union. The U.K. will hold a referendum on June 23, with surveys currently showing an almost even split between those who want to remain in the bloc and those who want to leave. About a quarter of respondents say they don’t know or won’t vote.

“‘Brexit’ is part of this tendency for some to say that independent nations can do it better than collective solutions,” Praet said. “I am confident that the voters will understand that national solutions are worse, that we have to reinforce Europe and not the opposite.”

— With assistance by Rebecca Christie

(Updates with economist comment in fourth paragraph.)
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