The European Central Bank’s money-printing and negative interest rates are pushing up inflation, but now governments that can must invest to improve their economies, one of the ECB’s top policymakers said.
In a speech about the almost-global slide in inflation, Peter Praet, the ECB’s head economist, addressed worries that “disinflation” could become a longer-term problem in the ECB’s 19-country euro zone.
He said though there was uncertainty about traditional economists’ tools such as the “Phillips Curve” — a gauge that reflects the push and pull factors between inflation and unemployment — aggressive current policy measures should bring things back in line.
“Is sustained disinflation indeed a realistic possibility? I believe it is not,” Praet said arguing that the link between inflation and unemployment appeared unbroken and that negative rates had eased concerns about what central banks would do once they reached zero.
“The power that negative rates have had in propagating our policy stimulus has been striking.”
The ECB, at its policy meeting on Wednesday, promised to press on “firmly” with its 1 trillion euro bond buying programme which is due to run for the next year and a half.
Praet said recent data pointed to “a turnaround in inflationary pressures in line with the cyclical upturn”, and that “indications bode well for future economic activity”.
For now though euro zone inflation remains stagnant. Praet said it was a case of “missing reflation”, where a “sequence of negative commodity price surprises may be dampening the
reflationary effect of the economic recovery”.
With signs the ECB’s efforts are starting to bear fruit — with inflation reaching -0.1 percent in March from -0.3 percent the previous month — he nonetheless urged governments to ensure there was a sustained impact.
“What is needed is to boost growth via increased investment, as investment not only creates current demand but future supply,” Praet said.
“Public investment on infrastructure, if sufficient fiscal space exists, as well as on education and training can promote a new wave of innovations and put more of the labour force to work.”
Source: Reuters (Reporting by Krista Hughes, Writing by Marc Jones in; Frankfurt; Editing by Alison Williams)