‘Creative’ ECB will defeat deflation says Praet

‘Creative’ ECB will defeat deflation says Praet.Responding to claims the central bank has run out of tools to stimulate growth and inflation, Mr Praet said the ECB has proven that it can “always find the means within the scope of our mandate” to act, writes Mehreen Khan.

In an interview with Portuguese newspaper Publico. Mr Praet said:

We have shown in the past that we can be very creative within our mandate. When people ask: “Are you ready for a new shock?”, I always answer: trust us, we always find the means within the scope of our mandate.

The ECB will begin its first purchases of corporate bonds under its asset purchase programme on June 1, and will begin to provide commercial banks with an unprecedented wave of cheap and negative-interest rate loans later this year.

These measures, combined with the possibility to cut interest rates even further, meant policymakers “have not felt hindered in our action by a lack of instruments”, and were “absolutely determined to avoid deflation”, said Mr Praet.

He added:

We never had a paralysis problem or a chaotic decision-making process. We always had quite strong agreement on decisions actually. Not always unanimity, but very strong support.

Mr Praet warned that the risks of future inflation remaining persistently low had increased, but policymakers were still not convinced expectations had become “de-anchored” – a term central bankers use to denote a dangerous trend where individuals no longer believe policymakers can raise inflation, and are less likely to demand higher wages.

“We have seen in some countries some signs of de-anchoring in wage formation. But, this being said, we haven’t concluded that inflation expectations are de-anchored”, said Mr Praet.

He added that Portugal – which is one downgrade away from being disqualified under the QE programme – would not be given any leeway if its loses its investment-grade status:

It’s very clear, we only buy investment-grade assets. We can have a rating waiver, but this is subject to a programme. So there is no ambiguity there.