ECB Chief Economist concerned about “vicious circle”

Peter Praet, Executive Board Member and Chief Economist at the European Central Bank, worries about the impact of uncertainties in his address, “Maintaining Price Stability in the Euro Area.” The speech was held on February 20, 2019, at the 11th Financial Centre Breakfast, organized by Frankfurt Main Finance together with the Association of Foreign Banks in Germany, for an audience of more than 100 guests at the Deutsche Bundesbank. Since 2015, this event series has provided a platform for the finance industry’s top thought leaders to address the most pressing issues for the European and global finance sector.

The following is an English translation of more detailed coverage of Peter Praet’s lecture, published in the February 21, 2019 edition of the Börsen-Zeitung and republished here with their permission:


ECB Chief Economist concerned about “vicious circle”

ECB Chief Economist Peter Praet expressed warnings of a “vicious circle” for the euro area economy and once again brought up the possibility of new support measures from the European Central Bank (ECB) – possibly also as a kind of hedge against negative scenarios. Praet spoke yesterday at the 11th Financial Centre Breakfast organised by Frankfurt Main Finance and the Association of Foreign Banks in Germany.

“Economic conditions in the euro zone are actually good,” said Praet. The trade conflicts and political uncertainties, such as Brexit and Italy, however, changed the economic climate in the euro area “fundamentally and not just temporarily”. “We have not yet entered a vicious circle, but we have come quite close,” he said. He added that the ECB could also be called upon if necessary; this would be discussed soon.

Debate about new ECB support measures

With his statements, Praet once again underscored his view laid out in an interview with the Börsen-Zeitung on Tuesday (cf. BZ of 19 February). He had thus fuelled speculation particularly on further long-term refinancing operations (TLTROs) by the ECB for banks. Praet plays a central role as chief economist in the consultations.

Yesterday, Praet also reiterated his demand that politicians should finally solve the problems they themselves have created. If the many conflicts and crises should not be resolved quickly, the ECB might be forced to intervene, according to Praet. If necessary, the central bank could thus also implement a kind of “insurance” to rule out even worse scenarios, he said.

Praet indicated that the discussion in the ECB Governing Council on new TLTROs will take place “soon”. “This does not mean, though, that we will ultimately take a decision,” he said. The next monetary policy meeting is scheduled to be held on 7 March. In the course of a second round of such operations, the ECB had lent around EUR 700bn to the euro zone banks starting in mid-2016 in order to boost lending.

Not least following Praet’s statements in the interview, more and more observers expect such supportive measures. In fact, this seems very likely – if only to avoid risking a hard cut when these operations expire. However, there is still likely to be intensive discussion in central bank circles about the design of the measures. This time, much seems to argue in favour of a variable instead of a fixed interest rate, as with the first TLTROs. The maturity and conditions for the banks play a role as well.

Praet yesterday rejected suggestions that adjusting the Governing Council’s forward guidance would not have much effect. So far, the forward guidance suggests that record low policy rates will not be raised “at least until over the summer of 2019”.  In the Börsen-Zeitung interview, Praet said that this could be adjusted if the euro zone economy were to cool down even more. Experts had then argued that a later date was irrelevant, as the markets were already pricing in a first-rate increase for 2020 or even 2021. Praet now rejected this argument. A forward guidance adjustment could have a “major impact” on overall market expectations, he said.