Praet says ECB will support Euro-area as slowdown signs show

Bloomberg.- The European Central Bank will support the euro-area economy even after the end of net asset purchases, Chief Economist Peter Praet said as he acknowledged the recent slowdown in growth.

The plan to cap bond-buying at the end of this year “is not tantamount to a withdrawal of monetary policy accommodation,” and “significant” stimulus is still needed to support inflation, he said in London on Tuesday.

“The sizeable stock of acquired assets and the associated reinvestments, as well as the strong anchor for policy rate expectations provided by our enhanced forward guidance, will continue to deliver the monetary policy stimulus necessary,” Praet said. “In any event, all our policy instruments can be adjusted to ensure that inflation moves towards our aim in a sustained manner.”

The outlook for the euro-area economy has grown gloomy less than a month from the next ECB meeting on Dec. 13, where policy makers are expected to mark a switch from their crisis-fighting mode by endorsing the end of net asset purchases.

Growth in the 19-nation bloc slowed to its weakest pace in four years last quarter as Germany economy probably contracted. While German investor confidence edged up in November, there was little expectation of a speedy recovery, a ZEW report showed on Tuesday.

Praet said the slowdown reflected a loss of global momentum, while domestic demand remained resilient and sentiment indicators were in expansionary territory. That underlying strength of the economy supports policy makers’ confidence that inflation will converge to their goal of just under 2 percent, he said.

Officials need to look through the noise in the data — German growth, for example, may have suffered from a switch to new emissions-testing standards at the country’s powerful auto industry. Only “a substantial degree of change” in the ECB’s current scenario would force a return to non-conventional measures, Praet said.

“Our forward guidance remains an effective firewall to insulate the euro area from unwarranted tightening pressures originating elsewhere,” he said. The ECB “will remain predictable, and we will proceed at a gradual pace.”

Turning to the December meeting, Praet said the Governing Council will communicate more about the horizon of its bond reinvestments. Executive Board member Sabine Lautenschlaeger said Monday she favored a “flexible” reinvestment policy designed to last “not too long in order to adapt and adjust to a changing environment.”

Current market expectations are for the ECB to recycle proceeds from its maturing bonds for “something between two and three years,” Praet told CNBC. “We look through the noise in the data before we clarify this,” he said. “I don’t think we need necessarily to rush.”

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