ECB's Chief Economist Highlights Need to Address Euro Design Flaws

The European Central Bank (ECB) may be poised to take decisive action against low inflation rates in the euro area. <br /><br />Ahead of an executive meeting in June, ECB President Mario Draghi, has warned that the body will not allow interest rates to remain too low for too long.<br /><br />Combined with credit constraints, low interest rates have been identified as a risk to the eurozone’s fragile recovery.<br /><br />Euronews spoke to Peter Praet, chief economist at the ECB, about eurozone monetary policy, consumer confidence and the key talking points ahead of next month’s discussions.<br /><br />Maithreyi Seetharaman, euronews: “Professor Praet, thanks very much for your time. We’ve had people trained to think about high inflation as a big problem. Now we’ve got low inflation, it’s around that one percent mark. Is that the new normal, and how do you tell people – everyday people – that this is something you need to worry about in the medium term, the long term? How do you view it?”<br /><br />Peter Praet: “If supply is bigger than demand so you get some pressure on prices. It’s really a sort of barometer that expresses some imbalances on the economy, that’s why you should be worried. In a symmetric way, if demand is bigger than supply you get inflation and on the other hand you get some deflationary pressures.”<br /><br />euronews: “If you look at the barometer and the projections from the ECB itself, inflation has surprised you. Is this a whole new normal we don’t know how to deal with?”<br /><br />Peter Praet: “There is weak demand because a lot of households, a lot of companies, a lot of states have high debt, so they reduce their spending compared to the capacity of the production of the economy. So, you get pressure on the pricing system which are more on the downside, which is a little bit the new environment that we have.”<br /><br />euronews: “What can be done at this point because quite a few economists say things should have been done two years ago?”<br /><br />Peter Praet: “It’s a complicated question. But the first thing is to identify what is the cause of this subdued price pressure. What we see today, in the more recent period, is that the slack factor dominates. The weaker oil price in the low inflationary picture that we have.<br /><br />“Second, I think we cannot say the ECB didn’t intervene. We know from market behavior that we had episodes of fear, real fear of deflationary pressures. That means that households and market participants didn’t know how the ECB would react to some crisis factor.<br /><br />“The episode we have now, the context we have now, is a more structural sort of pressure on prices which is the result of slack in the economy and so we have been taking accommodative monetary policy. Monetary policy is the interest rates close to zero, but also other tools that we have been putting in place.”<br /><br />euronews: “Can we ask what exactly are the measure that the ECB is planning to take?”<br /><br />Peter Praet: “Well, I think the governing council meeting will discuss, of course, but there are a number of things you have to see – what is the main impairment in the transmission of your monetary policy. And so, we have margin on rates as you know. <br /><br />“Interest rates are going to remain low. Not only today. Interest rates in the US, the long term interest rates have increased in the US because the situation is improving in the US. But we have been able to – contrary to the past – to decouple our interest rates from the US, that means policy remains accommodative. <br /><br />“More specifically, of course one of the issues that we have identified very much is the transmission via lending to smaller firms in general and so it is indeed true that we are looking at a number of possibilities there. We will see how the discussions go, but we have identified a number of impairments in the transmission of monetary policy and we are working on these issues.”<br /><br />euronews: “There has been a conversation about negative rates. Are we looking at a situation where credit slows down even more?”<br /><br />Peter Praet: “I think you allude to two things. Before we take the decisions we want really to see what is the real problem we are trying to address. And that’s what we are doing now. Is credit really too weak because of the environment – and which you cannot really do much about on that – or is that a specific lending supply of loans from the banking sector? In the context which I explained where the banks are in a process of cleaning up their balance sheet and of recapitalisation. So, we are working on that. But we have identified indeed that the lending channel is something which raises a number of questions about our transmission.”<br /><br />euronews: “Are we now going to expect low inflation for the medium to long term?”<br /><br />Peter Praet: “I think now, the biggest problem as I see it is that a number of households are revising downwards their long term