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De Guindos sees downside risks in euro area economy: «The ECB stands totally ready to react if needed»

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di Federico Fubini15 giu 2019

The 5y5y forward inflation rate is at an all-time low and clearly below where it was when Mario Draghi first hinted at quantitative easing (QE) in 2014. The ECB has already done some more easing and President Draghi himself mentioned that there was an interesting discussion at the latest Governing Council meeting on different tools to do some more easing – the asset purchase programme (APP) and others. What do you need to see in order to decide to do more?
«What we need to see is a de-anchoring of inflation expectations. This has not yet happened, despite the fact that there has been a drop in market-based inflation expectations. If you look at the survey of professional forecasters, the situation is a little bit different – expectations have remained stable. Then we need to see if there is a significant additional drop in economic activity – a crystallisation of the downside risks that we have indicated. We can always try to look forwards to get an idea of what might happen, but ultimately the reality is the reality. And, well, let’s see what happens. But I think the important part of our stance is that we are totally ready to react. We will have time enough to know the future when it arrives».
Does that imply that the current stance is appropriate, if your staff forecasts are confirmed?
«Yes. And if there is a further deterioration, then we will react. But for now, our monetary policy stance is fully compatible with both inflation and real activity. The important element is that we are totally ready to react. And I would add another element, if I may: risks are tilted to the downside».
Do you mean, in terms of real activity?
«Both in terms of real activity and in terms of inflation. So if those risks materialise, then we will react».
Can you think about different monetary policy tools to address different problems? If the issue is with the exchange rate, official rates are probably the answer; if it’s real activity, then QE; if it’s monetary transmission, then it’s targeted longer-term refinancing operations (TLTRO)…
«We do not allocate our instruments to different objectives. Something that I think is relevant, but is sometimes a bit overlooked, is that monetary policy is not almighty. If there is a problem with price stability, that’s within our mandate. But this is something everyone has to keep in mind to avoid creating expectations that will not be met: we do not have the philosopher’s stone».
Are you implying that having something of a policy mix would be good, in total respect of the ECB’s independence?
«Sure. But my point is that wherever there is a problem, for instance a problem with trade disputes, that is a real economic problem that is going to have real consequences. You can certainly smooth the impact with monetary policy, but you will not be able to address and fix this kind of problems with monetary policy. The real role of monetary policy is price stability. And in order to guarantee price stability, we have to monitor the evolution of the real economy – domestic demand, external demand, the exchange rate, and the rest. But you cannot fix all the economic problems of the world with monetary policy».
President Draghi hinted recently that if there is a slowdown and those downside risks materialise, fiscal policy might also play a........

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