UK Edition
QE may need to continue a little while yet, ECB economist warns
The European Central Bank's top economist has warned that its bond-buying efforts will have to continue beyond the planned deadline of September, if inflation does not pick up.
Inflation has remained well short of the central bank's target of close to, but below, 2pc in recent years. Monthly data released at the end of January revealed that prices had risen by 1.3pc, the lowest reading since July 2017. The ECB has also warned that it expects inflation to slow in the next few months.
Peter Praet, chief economist at the central bank, signalled that supportive monetary policy, such as continuing to buy bonds under its quantitative easing (QE) plan, might need to be extended further. Data might suggest that inflation is picking up, but that does not mean prices are rising strongly enough to maintain their trend upwards without support from the ECB, he warned.
Mr Praet said that too quick a move based on green shoots for inflation should not lead to a sudden shift in policy at the bank. He said: “Less supportive monetary policy conditions could imperil the inflation trajectory.”
Currently, the bank is expected to buy €30bn (£26bn) a month of eurozone bonds until September.
This comes after Mario Draghi, ECB president, said last month that he “saw very few chances” of an interest rate hike this year. His comments followed the release of December’s monetary policy meeting, which revealed that inflation was still dormant despite other indications suggesting that the Eurozone economy was gathering pace.
Mr Praet’s speech indicates that the forward guidance from the central bank, which is not expected to formally change until March, will remain highly flexible in terms of bond buying.
Mr Praet said: “We need patience because it takes time for price pressures to build up. And we need persistence because the pick-up in inflation is the result of the prevailing monetary policy stance.”
In a separate discussion on social media, Mr Praet said he believed that there would be a negative impact on the Eurozone economy in the event of a no-deal Brexit scenario.
Mr Praet said that Brexit will be a “negative supply shock” that will affect the UK far more than the Eurozone. He qualified that the intensity of any shock would be dependant on negotiations. Given the uncertainty surrounding the future economic relationship between the UK and EU, Mr Praet added that “contingency planning is essential”.