ECB underlines readiness to boost stimulus again if risks arise

[FRANKFURT] European Central Bank officials underlined their readiness to ease monetary policy even further should fresh risks to the economic outlook arise.

Echoing ECB Chief Economist Peter Praet, who spoke at a conference in Frankfurt on Thursday, Vice President Vitor Constancio told a parliamentary hearing in Brussels that the central bank is willing to do "whatever is needed" to return inflation to target. President Mario Draghi wrote in the foreword to the annual report that policy makers won't "surrender" to excessively low price growth.

"If further adverse shocks were to materialize, our measures could be recalibrated once more, commensurate with the strength of the headwind, also taking into account possible side-effects," Mr Praet said in Frankfurt. Not including the impact of the March 2016 quantitative-easing boost, "relative to the counterfactual scenario, our measures have provided significant support to output and inflation," he said.

Since the Frankfurt-based ECB last month cut rates to record lows and added corporate debt to the range of assets in its bond-buying program, policy makers have repeatedly underlined that the central bank hasn't run out of room to ease again. That pledge comes against a backdrop of increasing unease in financial markets over the use of negative interest rates and a dearth of evidence that too-low inflation is responding to stimulus.

"If inflation has remained weak, it is not because policy has been ineffective, but rather because new shocks have hit the economy in the meantime," Mr Praet said, "The scaling-up of our policy measures has hence been the appropriate response in the face of intensifying headwinds."

Price growth in the 19-nation currency area has been below the ECB's target of just under 2 per cent for the past three years. Even with more than 1.7 trillion euros (S$2.6 trillion) in quantitative easing already in the pipeline, the central bank doesn't forecast a return to that goal before the end of 2018.

Euro-area inflation was negative for a second month in March, something that Constancio said could exacerbate the fight to return it to target.

"One of the problems is that we see now that there are second-round effects, meaning that the headline inflation being negative is contaminating the core inflation when we exclude the price of energy and processed foods," the vice president said.

The unclear picture that the central bank has to counter was underscored by Mr Draghi in the institution's annual report.

"We face uncertainty about the outlook for the global economy," Mr Draghi wrote in the annual report. "We face continued disinflationary forces. And we face questions about the direction of Europe and its resilience to new shocks. In that environment, our commitment to our mandate will continue to be an anchor of confidence for the people of Europe."



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