ECB’s top economist signals need to act to maintain confidence

The European Central Bank’s chief economist warned of the perils of inaction to avert a slide in prices, as records of the bank’s latest policy meeting suggested new ECB action within weeks.

Peter Praet, one of the most influential voices at the central bank, spelled out his fear that consumers and investors could lose faith in the ECB's ability to keep prices on track if inflation slowed further.

Keeping price inflation close to 2 per cent is the ECB’s main mandate, and Mr Praet’s warning that the ECB will lose face by failing to do so signals a heightened readiness to act.

“I count the number of times we had to say we push back the horizon where inflation is going to go closer to (target),” Mr Praet told an audience of bankers, in a frank admission the goal has been evasive.

“At some point, you have a problem of credibility and ... it means that you have a risk always that markets and households, at some point, will revise down their long term expectations.”

Delayed investment

His warning echoed a similar message from other ECB policy makers. It reflects the central bank’s biggest fear, that as prices drop, companies will delay investment and consumers put off spending, choking the economy.

Markets are expecting further ECB action, such as charging a higher interest rate on banks that deposit money at the central bank, at a meeting of policy setters on December 3rd.

The ECB has been buying €60 billion a month of chiefly government bonds since March to revive inflation, but prices rose just 0.1 per cent in October.

Should prices start falling and expectations of future inflation decline, economic confidence might slide into a downward spiral that the ECB would struggle to contain.

Mr Praet made his comments as the central bank released records of its October meeting, which said the risk had increased that the ECB would again miss its inflation target.

Highlighting the debate in its Governing Council, the bank said it would either have to acknowledge that it is unable to meet the goal or needed to take more forceful action.

The ECB repeated its earlier stance that it was ready to act and would reexamine its policies at its December 3rd meeting.

“The anticipated timing of inflation normalising toward 2 per cent was likely to be pushed back again, as had already been the case in previous staff projections,” the bank said in the minutes.

Reuters