ECB keeps all policy options open

Euro-zone central bank may consider US-style asset purchases in bid to aid weak recovery

PUBLISHED : Thursday, 21 November, 2013, 2:47am
UPDATED : Thursday, 21 November, 2013, 2:47am

All policy options are open for the European Central Bank and it has discussed the broad possibility of asset buying, its vice-president said, as the OECD urged it to consider such action to aid a weak recovery.

The Organisation for Economic Co-operation and Development called on the ECB on Tuesday to emulate United States-style quantitative easing to help the single-currency area avoid a Japanese-style deflationary spiral.

ECB vice-president Vitor Constancio said the bank had discussed the possibility of quantitative easing but no technical planning work had taken place, although he added that "everything is possible".

"All those instruments are on the table … but no decisions, we did what we did and that's it," Constancio said, referring to a decision on November 7 to cut the bank's key interest rate to a record low of 0.25 per cent.

One of the euro-zone central bank's hawks, Joerg Asmussen, said separately that more policy action was possible if inflation continued to be well below the ECB's target.

"Risks of deflation may be slowly increasing," OECD chief economist Pier Carlo Padoan said.

One possible measure would be to use the negative deposit rate

"The ECB must be very careful and be prepared to use even non-conventional measures to beat any risk of deflation becoming permanent."

Inflation in the 17-nation euro zone fell to its lowest in nearly four years at just 0.7 per cent last month, prompting the latest rate cut. The euro-zone economy is struggling to recover from its longest-ever recession, which ended in the middle of the year.

Asmussen said the bank could move again, if necessary, to keep inflation in the euro zone in line with its target of below but close to 2 per cent.

"If the situation in inflation requires it, we can act again and one of the possible measures would be to use the so-called negative deposit rate," he said.

The deposit rate is now at zero. Cutting it further would mean banks would have to start paying to park their funds at the ECB overnight.

Asmussen said he would be "very, very careful" to deploy negative deposit rates, but he also did not want to rule it out completely. For now, he said, the risks to price stability were balanced and there was no risk of deflation in the euro zone.

The ECB's economics chief, Peter Praet, who first put the possibility of quantitative easing on the agenda last week, also said on Tuesday that there was no risk of deflation visible in the euro area, and inflation expectations were firmly anchored.

"We had several episodes where we measured in market prices the fear of deflation, which we don't see today," Praet said at a conference in Frankfurt.