FRANKFURT (Reuters) - 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 February 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 February 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) program, 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 funding governments.
The decision has prompted investors to ask questions about the validity of the OMT.
“The OMT program 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 instrument exists.”
“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 program 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 program, 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 program, 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 said.
“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