ECB still has ammunition against too-low inflation

09 Apr, 2016 3:14 pm

LONDON – The European Central Bank still has weapons to fight too-low inflation in the euro zone and will use them if necessary, Governing Council member François Villeroy de Galhau said in a published interview on Saturday.

“The ECB is not short of ammunition. Until we reach our inflation goal it will be legitimate to use every monetary policy tool,” the Bank of France governor told Italian newspaper la Repubblica. “If necessary, we could intervene further.”

The ECB targets an inflation rate of nearly 2 percent. Consumer prices in the euro zone fell 0.1 percent in March from a year earlier, after a 0.2 percent drop in February.

Villeroy de Galhau said the ECB was scrutinising temporary factors affecting inflation, such as plunging oil prices, to see if they produced lasting effects.

In a separate interview with Il Sole 24 Ore daily, ECB Governing Council member Ignazio Visco also spoke of the risks of so-called second-round effects on inflation from temporary elements such as low energy prices.

He warned they could trigger a deflationary spiral if falling consumer prices led to lower nominal wages.

“Signs that this is a possibility come from some cases of collective agreements recently signed in Italy,” the Bank of Italy’s governor added, without elaborating.


Visco said that interest rates in the euro zone could remain at very low levels for a long time, “but certainly not forever”.

The ECB last month cut its main refinancing rate to zero. It also cut the rate on banks’ overnight deposits at the ECB by 10 basis points to -0.4 percent and expanded its asset purchase stimulus programme.

Villeroy de Galhau said those decisions had proven the ECB still had “numerous and powerful tools” it could use.

“The ECB does its job. What’s missing badly is greater coordination of economic policies,” he said, urging the creation of a euro zone finance minister. -Reuters




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