ECB's Praet Urges Patience on Stimulus Amid Weak InflationBy
Central bank’s chief economist says price goal still elusive
Policy makers are discussing future of their bond-buying plan
The European Central Bank must be persistent in keeping up stimulus for the euro area while economic growth fails to boost consumer prices, according to Executive Board member Peter Praet.
“We are undoubtedly experiencing a solid, broad-based and resilient economic recovery that is contributing to a narrowing of the output and unemployment gaps, but a seeming disconnect between growth and inflation remains,” Praet, the ECB’s chief economist, said in a speech in Frankfurt on Wednesday. “The baseline scenario for inflation going forward remains crucially contingent on very easy financing conditions which, to a large extent, depend on the current accommodative monetary policy stance.”
The ECB’s 25-member Governing Council this month started discussions on how and when it might start to wind down its bond-buying program, which will total 2.3 trillion euros ($2.7 trillion) by the end of this year. Yet officials remain concerned, to varying degrees, that paring back support too soon will undermine the upturn.
Praet paid particular attention to worries that despite the fastest economic growth in a decade and declining unemployment, wage growth is struggling to pick up. He noted that the number of people employed in the euro area has increased by almost 7 million since mid-2013, offsetting all of the employment losses recorded during the region’s debt crisis.
“An important element keeping underlying price pressures subdued is muted wage dynamics, which are shaped by many factors,” he said. “As slack in the economy continues to be absorbed, reflationary forces will gradually build up and the traditional Phillips curve connection between inflation and the business cycle should eventually re-assert itself.”
His comments echo those of President Mario Draghi, who has himself called for persistence and prudence when considering the future of stimulus. Even so, with the risk mounting that the asset-buying program could eventually run into scarcity problems, officials are considering various options for reducing their reliance on bond purchases while maintaining their loose stance with other measures.
Draghi said this month that the “bulk” of the decisions on the future of quantitative easing will be made at the next policy meeting on Oct. 26
The timing for a decision about reducing QE purchases “has been postponed mainly because the developments are -- in our view -- still not confirming the decision which will inevitably follow,” Governing Council member Bostjan Jazbec said on Thursday. “We need more data and more confirmation that what we are doing is in line with fulfilling our mandate.”
— With assistance by Boris Cerni, and Alessandro Speciale