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ECB’s Schnabel Warns Euro-Area Inflation Could Dip Below Zero

Piotr Skolimowski
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ECB’s Lagarde Expects Disinflation as Crisis Transforms Economy

(Bloomberg) -- Euro-area inflation could dip below zero in coming months, European Central Bank Executive Board member Isabel Schnabel said on Saturday as she rolled out a vehement defense of the institution’s monetary stimulus.

Schnabel said the ECB’s decision this month to beef up its emergency purchase program to counter the coronavirus crisis was motivated by concerns that weak price dynamics would become entrenched, endangering the entire currency union.

“Inflation could remain at close to 0% well into the next year, and even negative inflation rates are possible,” Schnabel said. “It would go against the very idea behind the common currency if we were to stand idly by and watch the pandemic carve a rift into the euro area and produce deep divisions that would endanger the return to a single monetary policy in the long run.”

Schnabel remarks were largely a rebuttal of claims that the ECB’s extraordinary monetary measures in recent years are unnecessarily risky. It is currently battling a ruling by Germany’s top court that a 2015 bond-buying program, which is still running, could be illegal because the ECB didn’t show it had taken into account adverse side effects such as depressed interest rates for savers.

The Governing Council agreed this week to release non-public documents to the German authorities to resolve the standoff. Yet it’s now facing the risk of challenge to its newer pandemic program.

Schnabel said that without new bond purchases, “we would probably have found ourselves by now in the middle of a severe financial crisis with unforeseeable consequences for the economy, employment and price and wage developments in the euro area.”

No Limits

She also defended the decision to cast aside many of the limits that the ECB had imposed on the earlier bond-buying program, saying there are “clear safeguards” to ensure the pandemic plan doesn’t breach law banning the central bank from financing governments.

The so-called capital key, a principle under which bond-buying is linked to the relative size of each economy, remains an “important compass guiding us over the medium term” and “we could eventually reduce past deviations from the capital key, using, for example, the reinvestment phase” of the pandemic program, she said.

She also defended the choice of asset purchases over additional interest-rate cuts, saying internal analysis had shown the ECB would have had to cut its policy rate to minus 1.7% from the current minus 0.5% to have had the same effect as quantitative easing.

“Further policy rate cuts would have significantly intensified the distributional effects on borrowers and lenders,” she said. Losses to savers “would have been almost as large as the total losses accumulated over the course of the past six years.”

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