Praet says ECB rates can still fall if shocks worsen out­look

The Pak Banker - - COMPANIES/BOSS -

The Euro­pean Cen­tral Bank still has room to cut in­ter­est rates should the euro area's eco­nomic re­cov­ery fal­ter, Ex­ec­u­tive Board mem­ber Peter Praet said. "We have not reached the phys­i­cal lower bound," Praet, who is also the ECB's chief econ­o­mist, said in an in­ter­view with La Repub­blica pub­lished Fri­day. "If new neg­a­tive shocks should worsen the out­look or if fi­nanc­ing con­di­tions should not ad­just in the di­rec­tion and to the ex­tent that is nec­es­sary to boost the econ­omy and in­fla­tion, a rate re­duc­tion re­mains in our ar­mory."

Pres­i­dent Mario Draghi sur­prised in­vestors af­ter the ECB's March 10 pol­icy de­ci­sion, send­ing the euro higher, when he said he didn't think more rate cuts would be needed. He told Euro­pean Union lead- ers in Brus­sels on Thurs­day that the cen­tral bank had "no al­ter­na­tive" to mon­e­tary-pol­icy ac­tion that has taken the de­posit rate to a record-low mi­nus 0.4 per­cent, ac­cord­ing to two of­fi­cials fa­mil­iar with de­lib­er­a­tions.

"The ECB will want to see the ef­fect of those new mea­sures that it put in place in March," said Ben May, an econ­o­mist at Ox­ford Eco­nom­ics Ltd. in Lon­don, who sees Praet's com­ments as a sig­nal that ad­di­tional ac­tion is pos­si­ble but not im­mi­nent. "What they're try­ing to sig­nal to the mar­kets is that they're not done."

As well as cut­ting its de­posit rate by 10 ba­sis points, the Frank­furt-based ECB de­cided last week to in­crease bond pur­chases to 80 bil­lion euros ($90 bil­lion) a month from 60 bil­lion euros cur­rently, and added cor­po­rate debt to the pro­gram. It also an­nounced a tar­geted-lend­ing pro- gram known as a TLTRO that could see banks paid to take cen­tral-bank cash and lend it to the real econ­omy.

A Bloomberg sur­vey be­fore the de­ci­sion showed econ­o­mists saw the lower bound at mi­nus 0.5 per­cent. Deeper rate cuts risk hurt­ing bank prof­itabil­ity to the ex­tent that they pull back on credit to com­pa­nies and house­holds.

Praet said that the pack­age agreed "makes sense from an eco­nomic point of view," and must re­main in place un­til in­fla­tion is back on a sus­tain­able path to­ward the tar­get of just un­der two per­cent. "It must be sus­tain­able. We are not yet there." He re­it­er­ated the ECB's view that its loose pol­icy must be ac­com­pa­nied by struc­tural re­forms im­ple­mented by gov­ern­ments. Draghi made the same point tore­porters af­ter the EU sum­mit this week.

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