ECB Apparatchik Open to Action if Inflation Stays Low

April 22nd, 2014 8:44 am | by John Jansen |

Via MNI:

Linde:ECB May Be ‘Open to Action’ If No April Or May HICP Rise
2014-04-22 12:35:01.58 GMT

By David Barwick

WASHINGTON (MNI) – European Central Bank Governing Council member Luis Linde has told MNI that if Eurozone consumer prices do not improve in April and May, then the ECB may consider the state of low inflation as too prolonged and be “open to action”.

In an interview on the margins of the Spring meetings of the IMF and World Bank in Washington, Linde, who heads the Bank of Spain, echoed a number of his colleagues, including ECB President Mario Draghi, in warning in very clear terms that the euro’s exchange rate has become disagreeably strong and as such now enters into monetary authorities’ decision-making more than it used to.

Linde assessed the current risk of deflation at the level of the Eurozone as not very high, albeit nonzero, and stressed the Governing Council’s unanimity in countering the threat by conventional or unconventional means if necessary.
Indeed, “unanimity was the key word” in the ECB’s last introductory statement, he said.

“If the situation arises that the new data for inflation in April and May show that the danger of inflation being too low for too long is there, the communique implies that the Governing Council is ready to act,” he asserted.

“It is true there is no precise definition of ‘too prolonged,’ he conceded.
“To decide that it’s already too prolonged, we have to take a judgment decision.”

The state of inflation expectations will influence that decision, he suggested. “The models used by the ECB as well as other central banks in the euro area don’t show that the danger of deflation is imminent,” he said. “The risk is not zero, but it is not very high.”

Annual Eurozone HICP declined another 0.2 point in March to 0.5%, reaching its lowest level since November 2009 and surprising the ECB. Different econometric models predict that euro area inflation bottomed out in March, a view Linde said would probably be confirmed by actual numbers.

If price developments disappoint again and the risk of deflation is seen materializing, he warned, “then we are unanimous about taking action. The Governing Council is a serious body. So if we accepted a declaration of unanimity, then that means the Governing Council is ready to act.”

Turning to the common currency, Linde said, “It’s clear that the euro-dollar rate of exchange is now an important consideration for monetary policy, and indeed the appreciation of the euro is not helping the recovery. And it’s true that we are thinking now about the euro-dollar exchange rate more than we were a year ago.”

A cessation of the appreciation “would help the whole European economy,” he said. “We are interested in having a euro which stops appreciating versus the dollar.”

Linde, like other members of the Governing Council, left the door wide open as to what steps the ECB might take, if any. The purchase in particular of asset-backed securities “is part of the unconventional measures and to be considered as such,” he said.

“The practical point is that any QE programme is not easy to implement,” he elaborated. “Anything of this kind would require much detail work. The devil is in the detail.”

With respect to the real economy, Linde observed that Germany was clearly enjoying “a very good first half, and this will be reflected at the level of the Europe.”

He continued: “We don’t know how the second half will be, but the latest data clearly make it difficult for all of Europe to be in deflation. The prospects are for the recovery not to be very strong, but there is a recovery.”

Should the ECB revise up its growth forecast in June – which at least one Council member has predicted but which Linde was noncommittal about – while simultaneously slashing its inflation prediction, “this would be a very interesting situation which would require the ECB and the Governing Council to think a lot about what to do,” Linde said.

However, he said, it is “not likely” that such a scenario will indeed confront the ECB.

Reflecting on Spain, where the inflation rate most recently was below zero, Linde noted that models predict that there, too, inflation will be higher in the second half.

Deflation, he argued, occurs “when people expect prices to go down and down, and then defer expenditures because they want to buy cheaper in the future. I don’t think this is happening.”

Spanish growth in 2014 would be +1.2%, he estimated. “Our forecast is slightly higher than the IMF’s, but we think that +1.2% is feasible,” he said.

Thanks to gains in competitiveness, net exports “will make a good contribution to 2014 growth,” he said. “But there is no doubt that the level of indebtedness of the private sector is a problem.”

As to the ECB’s policies, “Spain cannot complain,” he said. “The monetary policy of the ECB has to take into account the situation in the whole euro area, of course. But ECB monetary policy was crucial for the Spanish economy and the Spanish banking sector in overcoming the worst tensions of the crisis in 2012.”

Linde predicted “generally comfortable results” from the asset quality review and stress test of the 90% of Spanish banks to be the responsibility of the single supervisor. “We think that no major problems will arise,” he said.

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