There is no need for the European Central Bank to respond with immediate policy reactions to below-target inflation, an ECB Governing Council member said on Monday. Another said the worst of the euro zone's economic woes are behind it. The ECB cut interest rates to a record low earlier this month and said it could take them lower still to prevent the euro zone's recovery from stalling after inflation tumbled to 0.7 percent - well below its target of just under 2 percent.
Council member Ewald Nowotny said a feeling that inflation could deviate persistently from the target helped explain the rate cut, though the decision came despite some internal discussion at the ECB on whether the timing was right. "If we have this kind of goal it means you have to take seriously whether it is above or whether it is below this goal," he told reporters in Vienna.
But he said the inflation target needed to be seen as a medium-term goal and there was no need to react immediately the goal was not achieved. "(But) if there should be a need for further measures, yes, we do have of course a number of measures in the arsenal," Nowotny added, without being more specific. But rather than see further economic trouble ahead, Nowotny and another ECB policymaker, Yves Mersch, both pointed to improvement in the euro zone's economic outlook.
"I think we should look to the future with confidence," Mersch, a member of the ECB's Executive Board, said in a speech at the Euro Finance conference in Frankfurt. "I think the worst is behind us." Nowotny, who is Austria's central bank chief, said the economic situation in the euro zone has started to improve but is still weaker than the ECB had hoped.
The comments follow those last week of ECB Executive Board member Peter Praet, who raised the prospect of the central bank starting to buy assets to bring inflation closer to its target, one of the central bank's most divisive tools. Praet, who is in charge of the ECB's economics portfolio, also suggested the bank could still cut deposit rates to negative territory, essentially charging banks to place their money with it.
ECB President Mario Draghi said after this month's rate decision the bank is "technically ready" to cut the deposit rate, but markets do not expect such a scenario to unfold. A Reuters poll of money market traders showed the vast majority did not expect the ECB to cut its deposit rate below zero. Mersch, who is from Luxembourg, Nowotny and Bundesbank chief Jens Weidmann are all ECB Council members from the euro zone core who generally take a more hawkish stance on policy than those from the periphery. All three reportedly wanted to wait for more data rather than cut rates already in November.