HELSINKI (Reuters) - Euro zone inflation remains unacceptably low and the European Central Bank will ease policy further if necessary to boost price pressures, policymakers said on Monday, just weeks after ECB chief Mario Draghi hinted at more stimulus.
With growth and inflation slowing for the better part of the last year, the ECB has given up on plans to tighten policy, and policymakers are now debating whether to cut rates further or restart a recently shut, 2.6 trillion euro bond purchase scheme.
But with interest rates already at a record low and the ECB’s balance sheet at 4.7 trillion euros, critics say that the potency of its remaining tools is limited and more easing can only provide a modest boost.
Speaking at a conference in Helsinki, chief economist Philip Lane and Governing Council members Klaas Knot, Pablo Hernandez de Cos and Olli Rehn all emphasized the ECB’s willingness and readiness to act.
“Especially when inflation deviates from its objective for an extended period, central banks ‒ including the ECB ‒ should adopt clear communication strategies that leave no doubt about their absolute commitment to meeting the inflation objective over the medium term,” Lane said.
The ECB has provided unprecedented stimulus for years and successfully revived the 19-member currency bloc only to see uncertainties over global trade and, to a lesser extent, Brexit unravel its work.
Indeed, growth in the second and third quarter of this year could weaken compared with the first three months of the year, Knot, the Dutch central bank chief said, noting that the long-heralded rebound appears to be delayed.
“It is indisputable that inflation remains too low,” said Knot, a policy hawk, adding that the ECB was determined to act in case of an adverse scenario.
Lane also disputed critics who argue that the ECB’s policy arsenal is nearly depleted.
“Our assessment is that (our) policy package has been effective and further easing can be provided if required to deliver our mandate,” Lane said. “The effectiveness of the policy toolkit means that we can add further monetary accommodation.”
The ECB next meets on July 25. Some analysts expect it to announce more stimulus measures then, while others don’t see a move coming until its Sept. 12 meeting, when it will also issue new economic projections.
At minus 0.4%, the ECB’s deposit rate is already at a record low and not far above what is considered the “effective lower bound” for rates. With government borrowing costs already also at record lows, more bond buys may do little to encourage euro zone states to spend.
“In the short term... we are again in the difficult situation,” de Cos, Spain’s central bank governor said, referring to weak inflation and slow growth.
The problem of weak price growth is not unique to the euro zone. Major central banks around the world appear to be struggling to understand what may be a broader shift in price setting.
“The ECB – much like other central banks – operates in a new environment where long-run trends, such as population aging, lower long-term interest rates and climate change have become key policy issues,” Rehn, Finland’s central bank governor, added.
Given these changes, Rehn repeated his argument that the ECB should conduct a broader review of its policy strategy, as its last review was over a decade ago and the bank has since then been forced to reinvent its policy toolkit.
Reporting by Balazs Koranyi; Editing by Toby Chopra and Hugh Lawson