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MNI (London)
--ECB Chief Economist Comments from Published Interview In Borsen-Zeitung
By Luke Heighton
     FRANKFURT (MNI) - Europe's economic slowdown has been broader and more
persistent than anticipated, the ECB's Chief Economist said Monday, adding that
the ECB's March meeting of the Governing Council will see crucial discussions
over future rate-setting, forward guidance and the necessity for a new round of
Targeted Long-Term Refinancing Operations (TLTROs).
     Here are the key points from Peter Praet's February 11 interview with
Borsen-Zeitung, published February 18.
     - Praet said he expected economic projections (due in March) "in the near
term, in particular" to be revised downwards. "The economic slowdown is broader
and more persistent than had been thought and growth in the short term is likely
to fall short of previous expectations." But, Praet added, for the ECB Governing
Council, the medium-term perspective "is decisive for us, most especially the
question of whether we are dealing with a temporary soft patch or with a more
prolonged weakness".
     - "The data since the January meeting have not only held negative
surprises," Praet said, "they have also contained a few positive signs such as
the further decline in unemployment". Yet he conceded: "It's also true that
growth in the third and fourth quarter of 2018 and most likely also in the first
quarter of 2019 is well below the potential growth rate of the euro area economy
[...] The question now is whether there will be a rebound in the second quarter
and beyond. A rebound is likely, but it is too early to say by how much".
     - Positives include the continued growth of euro area household
consumption, rising employment and increasing wages - even though the
passthrough from wage developments to consumer price increases "has not not
worked out as expected". Nevertheless, "the fiscal stance has become slightly
more expansionary in the euro area as a whole. That is not a major development,
but it helps a little," Praet said.
     - Praet described persistent political uncertainties as "by far" the euro
area economy's "biggest problem". The state of the UK economy "shows the damage
that can occur when uncertainty persists for too long. Investment in the United
Kingdom has fallen sharply. It is high time to put an end to these uncertainties
in a positive way," he added.
     - Overall, he said, "the probability of a recession remains low," even if
"the level of alert is higher than before". But, Praet cautioned: "Downside
risks to growth could then lead to downside risks to inflation in the medium
term. We are not at that stage yet, but this will be an important discussion
point at the next meetings of the ECB's Governing Council".
     - The ECB "will always find ways and means of acting if it needs to," Praet
said. "In case we would cease to be confident that inflation is converging to a
level that is below, but close to, 2%, it would be our mandate to act." In the
case of an economic slowdown, "interest rates are generally the instrument of
choice," he said. Asset purchases, therefore, remain "part of the current
     - If the euro area were to slow "more sharply [the Governing Council] could
adapt our forward guidance on interest rates and this could be complemented by
other measures". Moreover, "there will be a point in time when the
calendar-based leg of our forward guidance will be discussed and, if needed,
adapted. We have been very careful so far not to validate market expectations".
     - On TLTROs, Praet said, "the procyclical behaviour of banks is an
important reason why economic cycles sometimes end badly," therefore "we do need
to monitor the transmission of monetary policy through the banking system
carefully. In March we will make an assessment of the current and expected state
of bank transmission".
     - A return to greater normality "will certainly take a long time," Praet
said. "We are very cautious at the ECB about estimates of the natural rate of
interest", while "the likelihood of reaching the lower bound on interest rates
is much greater than previously thought".
--MNI London Bureau; tel: +44 203-586-2225; email:
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MNI London Bureau | +44 203-865-3812 |