November 29, 2019 / 12:43 PM / 11 days ago

ECB board candidates back bond buys and negative rates

FRANKFURT (Reuters) - The two European Central Bank board nominees up for confirmation next month struck a dovish tone on Friday, arguing that weak growth and subdued inflation prospects justify stimulus.

FILE PHOTO: Isabel Schnabel, member of the German advisory board of economic experts attends the 29th Frankfurt European Banking Congress (EBC) at the Old Opera house in Frankfurt, Germany November 22, 2019. REUTERS/Ralph Orlowski

German economist Isabel Schnabel and Italy’s Fabio Panetta, who are expected to join the ECB’s board in early January, argued that the economy depended on the bank’s help and negative interest rates, often criticized by banks, have benefited the economy.

The ECB approved fresh stimulus in early September, generating unprecedented public discord among policymakers, which culminated in the resignation of German board representative Sabine Lautenschlaeger, who had unsuccessfully opposed several rounds of policy easing.

“Given lower inflationary pressure, these decisions can be justified by current inflation data as well as the outlook for inflation over the medium term, which is not yet converging to the objective of below, but close to, 2 percent,” she said in written replies to questions from the European Parliament’s committee on economic affairs.

Bundesbank President Jens Weidmann and Lautenschlaeger, Schnabel’s predecessor on the board, both opposed the restart of bond purchases, which will now go on indefinitely.

“The decisions also reflect the difficulty in keeping up the monetary stimulus when interest rates are close to the effective lower bound,” Schnabel said, adding that she “fully subscribed” to the view that accommodative monetary policy was needed.

Panetta, the senior deputy governor of the Bank of Italy, made similar points in a separate reply, just days before the two candidates face the committee in a confirmation hearing.

“Recent data indicate that the inflation outlook seems to fall short of the Governing Council’s inflation aim of below but close to 2%, and hence calls for an accommodative monetary policy,” Panetta said.

Both Panetta and Schnabel defended the ECB’s experience with negative rates, calling the policy positive, even if it may come with side effects that require monitoring.

“At the current juncture the benefits from the ECB’s measures, including negative rates, still exceed their potential side effects,” Panetta added.

Both said that there is a point beyond which cutting rates may not make sense because it drags down bank profits and lenders would then become an obstacle to transmitting monetary policy.

Reporting by Balazs Koranyi and Francesco Canepa; Editing by Alison Williams

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