MANNHEIM, Germany (Reuters) - The risk has increased that the European Central Bank will miss its medium-term inflation target and the bank is prepared to beef up its asset purchase program, known as quantitative easing, if necessary, a top rate setter said on Wednesday.
The bank is buying 60 billion euros worth of assets each month, hoping to boost prices and growth after a brief bout of deflation and expectations that price growth would take years to rise back to the ECB’s target of just below 2 percent.
“Developments in the world economy and commodity markets have increased the downside risk to achieving the sustainable inflation path towards 2 percent; the risk has increased,” Executive Board member Peter Praet told reporters on the sidelines of a conference.
“There should be no ambiguity on the willingness and ability of the governing council to act if needed,” said Praet, who is also the bank’s chief economist. “The PSPP (public sector purchase program) provides sufficient flexibility to do so in terms of size, composition and length of the program.”
Crude oil prices LCOc1 have fallen to $43 per barrel from over $110 per barrel last June while iron ore price .IO62-CNI=SI are near historic lows on expectations that Chinese growth will continue to slow, hitting its lowest level in two decades.
Praet said emerging market growth was weakening and the output gap in some emerging markets was widening, a marginal challenge for the euro zone but still a potential headwind.
He added that the ECB would have to weigh the consequences of higher market volatility on financing conditions.
“From a monetary policy perspective, we will have to think about the consequence on the pricing of risk as markets will somehow incorporate this volatility behavior into the pricing of risk and we have to understand what the consequences are on financial conditions in general,” he said.
Reporting by Balazs Koranyi and Francesco Canepa; Editing by Mark Heinrich and Gareth Jones