September 12, 2017 / 2:05 PM / in 9 months

Unconventional monetary policy here to stay: ECB's Constancio

FRANKFURT (Reuters) - Unconventional central bank tools have largely worked and should remain part of the policy arsenal despite some deficiencies, European Central Bank Vice President Vitor Constancio said on Tuesday.

European Central Bank (ECB) Vice President Vitor Constancio is seen at a news conference at the ECB headquarters in Frankfurt, Germany July 20, 2017. REUTERS/Ralph Orlowski

Having faced the threat of deflation, the ECB launched unprecedented stimulus years ago, cutting rates deep into negative territory, buying trillions of euros worth of assets and providing banks with ample liquidity.

The measures have raised inflation more slowly than expected.

Constancio said the ECB would hit its mandate “eventually”, even if policymakers are now puzzled by the absence of wage and price pressures amid robust growth.

“By keeping a sufficient degree of monetary policy accommodation we can be confident that our goal will eventually be reached, in accordance with our mandate,” Constancio told a conference in Frankfurt.

“Non-standard measures are going to be part of our toolkit for some time to come, and some of them might even be deemed standard measures at some point,” Constancio said.

Faced with steady economic growth and weak inflation, the ECB will decide in October whether to dial back stimulus, accepting that inflation will take longer to reach its target of almost 2 percent.

Constancio added that interest rates could still be lowered in theory as the positive side effects outweighed the negatives.

“We are happy with the experience and we think the evidence accumulated so far points to the negative side effects being dominated by the positive aspects of the policy, which means that this is a new instrument in the central banks’ toolkit to be used in exceptional circumstances,” he said.

He also added that the ECB could eventually reduce its balance sheet since the funding market was predominantly bank-based, even if asset buys should remain a tool to be applied again in the future if needed.

Constancio was more critical of the ECB’s forward guidance, which signals the bank’s longer-term policy intent.

“We will continue using forward guidance to some extent, but knowing that it is an imperfect tool and therefore only as one of the various non-standard measures that we can activate when deemed necessary,” he said.

Reporting by Balazs Koranyi; editing by John Stonestreet

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