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ECB's Lane warns against tolerating low inflation as more stimulus looms

·3 min read
Executive Board member of the European Central Bank Philip Lane attends the Fortune Global Forum in Paris

FRANKFURT (Reuters) - The European Central Bank's chief economist warned on Thursday that accepting "a longer phase of even lower inflation" would hurt consumption and investment as well as cementing expectations for low price growth in the future.

The ECB is preparing a new stimulus package to help cushion the impact of the coronavirus pandemic. It's also reviewing the way it goes about its business, after failing to raise inflation to its target for almost a decade.

Lane said that simply letting price growth undershoot the ECB's target of just under 2% was not an option.

"Tolerating a longer phase of even lower inflation ... than originally envisaged would be costly and risky," Philip Lane told an academic audience via weblink.

"First, it would imply a weaker recovery of consumption and investment, as a result of higher expected real interest rates. Second, it would contribute to a downward drift in inflation expectations that might become entrenched."

Fellow ECB board member Isabel Schnabel said this week the central bank should consider taking longer to raise inflation to its 2% target as its ultra-easy policy is constrained, has side effects and risks alienating the public.

Under its strategic review, the ECB is expected to change its goal to 2% over an unspecified "medium term" and reaffirm its commitment to symmetry, meaning that any undershooting of the target should be taken as seriously as an overshooting.

The euro zone's central bank has kept the money taps wide open for years and promised further stimulus, likely in the form of even more bond purchases and subsidised loans to banks, at its Dec. 10 meeting.

ECB policymakers gathering last month agreed they could not afford to seem complacent in the face of a second-wave of coronavirus infections, after already underwhelming investors twice since the start of the pandemic.

The ECB triggered a market backlash during the first wave of the pandemic in March, when investors deemed its initial moves too timid. It disappointed them again in September when it was expected to intervene more forcefully against a rally in the euro.

"Any sign of complacency – even inadvertent – could be detrimental in the present circumstances," the ECB said in its account of the meeting, which was published on Thursday.

Lending to euro zone companies was already slowing in October, with banks increasingly worried about credit risk as the bloc heads into a double-dip recession, ECB data showed on Thursday.

Since then, however, three drug-makers have published encouraging results from their trials of vaccines against COVID-19. That fuelled some optimism among policymakers, but comments by Austrian governor Robert Holzmann and his Irish colleague Gabriel Makhlouf suggested policy easing remained firmly on the cards.

"We will not only have to think about further purchase programs, but also discuss all possibilities," Holzmann told Boersen-Kurier. "Even the implementation of new instruments is not entirely ruled out."

(Reporting By Francesco Canepa and Balazs Koranyi; additional reporting by Padraic Halpin in Dublin and Riham Alkousaa in Berlin; editing by Larry King)