Top ECB policy makers reinforce case for fresh stimulus

RIGA/BERLIN: The European Central Bank will keep printing money until price growth picks up and has a duty to use all instruments in its toolbox, including a deposit rate cut, to achieve its inflation target, three key ECB policy-makers said.

Their messages reinforced expectations for fresh policy action from the ECB after President Mario Draghi said last week the bank was considering new stimulus measures and would decide on the matter when it gets updated inflation forecasts from its staff in December.

ECB Executive Board member Benoit Coeure said the bank might need to reduce its deposit rate if it sees a risk of price growth rebounding more slowly than previously expected.

“If we see a risk that inflation would go back to 2 percent … in a much more sluggish way than would be previously expected …, that may also mean an adjustment of the deposit facility rate,” Coeure said in Mexico City overnight. “It’s an open discussion.” The ECB’s deposit rate is currently -0.20 percent, effectively making banks pay to park funds overnight at the central bank. Vice President Vitor Constancio said the ECB will maintain low interest rates and keep expanding its balance sheet via asset-purchases until inflation significantly picks up.

“Our main policy rates will stay low for a prolonged period of time, in line with our forward guidance and the asset purchase programs will keep our balance sheet expanding until we see a sustained adjustment in the path of inflation,” Constancio said at an event in Berlin. He played down concerns about price bubbles caused by money printing and excessive credit, saying they were premature and the ECB should focus on its inflation mandate.

Expectations of further easing by the ECB have knocked the euro against the dollar in recent days and were seen as making it more difficult for the Federal Reserve to go ahead with its first rate hike since 2006.

The ECB has been buying 60 billion euros ($66.41 billion)worth of assets every months since March in a bid to revive anemic inflation in the euro zone.

Despite this, consumer prices in the 19-country bloc slipped by 0.1 percent in September and an ECB survey showed last week inflation is seen missing the bank’s target of almost 2 percent until 2017.

Data on Friday is expected to show there was no inflation in October.

When it met in Malta last week, the ECB’s Governing Council discussed a wide range of possible measures. The general view was that a combination of policy steps, probably including a deposit rate cut and beefed up asset purchases, may be effective, sources told Reuters earlier this week.

Speaking to an audience in Riga on Wednesday, ECB Chief Economist Peter Praet said the bank had a duty to use all the instruments at its disposal to achieve its mandate or it risked losing its credibility.

“The credibility of the policy… you cannot take it lightly,” Praet said. “You have a duty to use the instruments.”

Asked whether the ECB may follow into the Bank of Japan’s footsteps and buy equity exchange-traded funds (ETFs), Praet cautioned that there might be little point in building a small position in a new asset class, like the BOJ did. Some members of the ECB’s governing council, which includes the executive board and heads of the bloc’s 19 central banks, poured cold water on the prospect of imminent new stimulus, setting the scene for a lively debate at the December meeting.

Estonian central bank chief Ardo Hansson said he saw no reason to take fresh policy steps in December unless something very fundamental changed.

Latvia’s central bank governor, Ilmars Rimsevics, said there was no need to rush into an expansion of its quantitative easing program this year, considering that the eight-month old QE scheme had “just started”.

Reuters.

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