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ECB's next VP echoes bank's policy line in Parliamentary hearing

MADRID/BRUSSELS (Reuters) - The European Central Bank is following the right policies to raise inflation and prices should continue rising back towards target in the coming quarter, Spanish Economy minister Luis de Guindos, the bank’s next vice president, said on Monday.

FILE PHOTO: Spain's Economy Minister Luis de Guindos speaks during a news conference after the weekly cabinet meeting at Moncloa Palace in Madrid, Spain March 31, 2017. REUTERS/Sergio Perez/File Photo

Largely echoing the ECB’s standard policy line, de Guindos said he was increasingly confident that inflation would rise but that stimulus is still needed and interest rates should not be increased until after bond purchases are wound down.

“My impression is that the approach pursued by the ECB so far has been the correct one,” de Guindos told the European Parliament’s committee on economic affairs. “Now nobody (has)doubts about price stability in the euro area.”

De Guindos is due to take over as ECB Vice President from Portugal’s Vitor Constancio in June, with his appointment now seen a formality as there is no other candidate for the job.

The ECB’s 2.55 trillion euro bond purchase scheme, launched three years ago to cut borrowing costs and rekindle inflation, is expected to end by the close of the year as growth is robust, even if inflation is proving slow to respond.

But de Guindos argued that interest rates may stay low indefinitely, potentially forcing the ECB to make non-standard policy measures a permanent part of its arsenal.

“I think we have a very low real natural interest rate,” he said. “If we are able to achieve and attain our inflation target, the nominal interest rate is going to be hovering around 2 percent so there is very little leeway in the future for monetary policy to respond. So the non-conventional measures… will become increasingly conventional over time.”

De Guindos also rejected a suggestion that the ECB might be behind the curve in reducing stimulus when compared to the U.S. Federal Reserve.

“I do not see the ECB as a laggard in terms of monetary policy response,” he said in response to a question. “The European Central Bank is in a different situation, different phase of the business cycle.

“Nevertheless the fundamentals of the European economy are better than the fundamentals of the U.S. ... and over time the monetary policy of the ECB will converge towards what we have seen now in terms of monetary policy of the Fed,” he said.

Repeating the ECB’s long-standing message, de Guindos said banks should accelerate the reduction of soured debt on their balance sheets and argued that the euro zone would benefit from better coordination of fiscal policies.

Reporting by Jesús Aguado and Balazs Koranyi; Editing by Catherine Evans