* Praet sees no risk of deflation, but admits price
* Slowdown in emerging markets offset by developed countries
* "The OMT programme exists," Praet says
* Growth in Portugal has started to become sustainable
(Adds comments on OMT, Portugal, growth, bank health checks)
FRANKFURT, Feb 22 Weakness in euro zone price
pressures is extending into the medium-term, the time horizon
the European Central Bank looks at when deciding on policy, ECB
policymaker Peter Praet said.
Praet, who holds the powerful economics portfolio on the
ECB's Executive Board, told Portuguese newspaper Expresso: "If
our mandate is at risk, we will act without hesitation".
The ECB's mandate is to deliver price stability, which it
defines as inflation of close to but below 2 percent over the
medium-term. Euro zone inflation is running at just 0.7 percent
- well below the target.
"We do not see a risk of deflation, but we admit that the
pressures on prices are weak, and that this weakness in price
development is extending to the medium-term," Praet said in the
newspaper interview, conducted on Feb. 18.
The ECB, which holds its next policy meeting on March 6, has
set out two scenarios that could trigger fresh policy action: a
deterioration in the medium-term inflation outlook and an
"unwarranted" tightening of short-term money markets.
A cut in interest rates is one option for dealing with low
euro zone inflation, or tight money markets.
Another option the ECB has discussed is to suspend
operations to soak up the money it spent buying sovereign bonds
under its now-terminated Securities Markets Programme (SMP)
during the euro zone's debt crisis.
The ECB has vowed to keep interest rates "at present or
lower levels for an extended period of time".
"When we issued our forward guidance last November, we
communicated that we will continue to have a very loose monetary
policy and we will do whatever is necessary to fulfill our
mandate," Praet added.
"We are therefore very aware of what you are referring to,
i.e. that low price pressures have extended to the medium term.
Let's make this assessment in March."
ECB President Mario Draghi talked at his Feb. 6 news
conference about getting more information, such as GDP data, and
seeing how the situation in emerging markets develops before
deciding whether to take fresh policy action.
Since then, GDP growth has come in slightly stronger than
expected and emerging markets turmoil has calmed.
"From the point of view of growth, for now, the slowdown in
emerging markets is being offset by higher economic growth in
developed countries," Praet said.
"THE OMT EXISTS"
Praet insisted the status of the ECB's flagship
crisis-fighting tool, the Outright Monetary Transactions (OMT)
programme, was unchanged despite the assertion of Germany's
Constitutional Court that it exceeded the bank's mandate.
The German court earlier in February referred a complaint
against the OMT to the European Court of Justice, saying there
was good reason to think the OMT plan violates a ban on the ECB
The decision has prompted investors to ask questions about
the validity of the OMT.
"The OMT programme exists. The case was referred to the
European Court of Justice, which the ECB deems to be a good
decision," said Praet. "But independently of the court case, the
"The instrument is there. For us nothing has changed."
Praet's OMT remarks chime with those of other ECB
policymakers. Another Executive Board member, Benoit Coeure,
told Reuters earlier this month the programme was intact but "it
is highly unlikely it would have to be used at the moment".
Turning to Portugal, Praet said of the latest review of
Lisbon's bailout programme, which has just begun: "As far as we
know, the results have been impressive.
"While a contraction in GDP was underestimated at the
beginning of the programme, we are currently surprised on the
upside," he added. "Growth in Portugal has started to become
sustainable, which is new."
On the euro zone banking sector, the ECB's health check of
banks was helping restore confidence to the financial system, he
"Some say that this exercise can be bad for growth because
banks will deleverage faster and all that, but what we see today
is the opposite," Praet said.
"Profitability is now the ultimate question," he added. "The
sector must be profitable again."
To read a full transcript of the interview, click:
(Writing by Paul Carrel; Editing by Sonya Hepinstall)