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Free AccessMNI POLICY: ECB's Panetta Sees 2-3 Years' Very Low Inflation
By Luke Heighton
FRANKFURT (MNI) - The European Central Bank has addressed the
proportionality of its Public Sector Purchase programme "repeatedly", Executive
Board Member Fabio Panetta said in an interview Wednesday, in a rebuke to German
judges who ruled the ECB has taken insufficient account of the effects of its
extraordinary monetary policies.
"The ECB does not fall under the jurisdiction of the German Federal
Constitutional Court," Panetta told Austria's Der Standard, "but rather under
that of the Court of Justice of the European Union, which ruled in December 2018
that the ECB is acting within its price stability mandate and in compliance with
the principle of proportionality."
Here are the key points from the interview:
- "The ECB has repeatedly discussed these issues in public in the past,"
Panetta said, "including as part of its accountability to the European
Parliament. We have spoken extensively about the potential side effects of our
public sector purchase programme. There have been ECB publications on the topic
as well as frequent interactions with parliamentarians. Proportionality was
discussed in detail, also with the Court of Justice of the European Union in the
course of its decision about our programme."
- The ECB "will do everything that is necessary to secure price stability
in line with our mandate and avoid disinflationary or even deflationary risks,"
Panetta said. "And we remain determined not to tolerate any tightening of
financing conditions for as long as the economic damage caused by Covid-19
persists. We have all the necessary tools, we are using them decisively."
- Panetta described the current European economic environment as "clearly
disinflationary," and added that the ECB expects inflation "will stay very low
for the next two or three years, well below our definition of price stability. I
can't say what will happen in ten years, but I note that market-based indicators
of longer-term inflation expectations have remained at depressed levels."
- "One of the biggest challenges," Panetta said, "is to prevent the
eurozone from emerging from this crisis with even more regional fragmentation
than it had on entering it. This risk is real and one reason why we need a
symmetrical and forceful response to this crisis. Not out of solidarity towards
anyone in particular, that is a moral category, but because of our tight
economic interlinkages."
- Euro area government debt will be "much higher" after the Covid-19
crisis, Panetta admitted, "so on the one hand we will be worse off." But he
cited demographic developments, an excess in saving and less potential for
innovation, and secular stagnation as factors that would continue to depress
interest rates and make government debt more sustainable in future. However, he
added, "the path towards secular stagnation is not inevitable. Many prominent
economists believe that, given structurally low interest rates, advanced
economies can tolerate higher debts today without having to rush into premature
fiscal consolidation. What matters is whether the debt is financing productive
spending that leads to higher future growth."
- Asked when the European economy and monetary policy return to 'normal',
Panetta replied: "As soon as possible, but no sooner. It would be
counterproductive if, having made every effort to keep the economy going, policy
support were then to be switched off too early. And on the fiscal side, it will
be key to have self-sustaining economic growth. One of the big mistakes after
the financial crisis was that fiscal policy in the euro area shifted too quickly
to a pro-cyclical stance."
- Banks are more resilient today than they were a decade ago, Panetta said,
"but we can't rule out risks. If there is a longer recession, the financial
sector will be hit too. But compared with the time of the financial crisis,
governments are now far more aware of the kind of difficulties that could lie
ahead for the financial sector."
- Lowering the ECB's inflation target from below, but close to, 2%, would
not be a "good idea," Panetta said. The current level grants a safety margin to
deflationary territory, he argued, while also taking into account possible
cross-country differences in the price level. It also implies that nominal
interest rates are higher, he said, giving additional policy space for monetary
accommodation, and makes it easier for real wages to adjust if needed. The
current target also allows for the possibility that there is a distortion of as
much as 1% when measuring inflation, he continued, as price pressures can also
reflect improvements in product quality, "which means that measured inflation is
always somewhat higher than actual inflation."
--MNI Frankfurt Bureau; +49-69-720-146; email: luke.heighton@marketnews.com
--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com
[TOPICS: M$X$$$,M$$EC$]
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Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.