MNI 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$]