FRANKFURT: The European Central Bank appears to be increasingly on the defensive, stepping up efforts this
week to counter criticism of complacency after it held interest rates steady again this month.
A whole range of top ECB officials—from president Mario Draghi to chief economist Peter Praet and the newest executive board member Sabine Lautenschlaeger—have felt compelled to defend the decision not to ease monetary conditions any further, despite an alarmingly low level of inflation.
The ECB last cut its key “refi” refinancing rate to 0.25 percent in November but has not taken any additional measures since, despite concerns the single currency area could slip into deflation.
Deflation is a widespread decline in prices which can lead to consumers delaying purchases. It can trigger a destructive spiral where companies forced to cut prices also cut wages and lay off workers, leaving consumers with less money to spend and the entire economy worse off.
“Acting just for the sake of acting makes no sense,” said Sabine Lautenschlaeger, who joined the ECB’s executive board in January.
“I reject it if someone says we are complacent. There was no strong reason to act,” Lautenschlaeger said in her first newspaper interview since taking up her position.
The ECB’s chief economist Peter Praet similarly rejected suggestions that the central bank was “behind the curve” and under-estimating the dangers of deflation. “We have a clear view of the situation and we will act when necessary,” Praet insisted at a central banking conference. “At present, risks of deflation ... are quite limited,” said ECB chief Mario Draghi.
But Draghi also insisted that the ECB has been preparing “additional non-standard
monetary policy measures” and would take “decisive action” if needed.
Given the ECB’s pro-active fire-fighting role throughout the eurozone crisis, central bank watchers said they are convinced that Draghi and his team are not suddenly being complacent.
Rather, with interest rates close to zero, the bank’s options were more limited, analysts said.
“Conducting monetary policy is simply not as easy as some analysts think,” said Carsten Brzeski at ING DiBa.
Tools that other central banks had at their disposal—such as quantitative easing or the purchase of asset backed securities—would be either “very hard (for the ECB) to implement, highly controversial and it is far from certain whether they would really work,” Brzeski said.
“All of this leaves the ECB with only one last option and this is a rate cut. But as long as the macro-scenario predicts a gradual recovery and low inflation is mainly driven by energy prices, there is no reason for the ECB to act,” Brzeski said.
RBS economist Richard Barwell also felt that the ECB’s hands were tied. Its apparent reluctance to act was because the ECB’s governing council “has run out of easy options, not that it is indifferent to low inflation,” Barwell said. AFP
