ECB talks up prospect of further rate cuts

The ECB’s chief economist, Peter Praet, said rates have definitely not reached their lower limit

ECB president Mario Draghi’s comments last week caused the euro to spike up to $1.12 (AFP)

The European Central Bank yesterday moved to nudge market expectations over the likelihood of more monetary easing in a dovish direction as its chief economist insisted that it was possible for rates to decline still further.

The euro was sent on a wild ride last week after the central bank cut its benchmark interest rate to zero but the ECB’s president Mario Draghi later in a press conference said: “we don’t expect it to be necessary to reduce rates further”. The single currency fell as low as $1.08 before shooting back up to $1.12 after Mr Draghi’s comments.

But in an interview published yesterday the ECB’s chief economist, Peter Praet, said rates have definitely not reached their lower limit. “As other central banks have demonstrated, we have not reached the physical lower boundary” he told the Italian newspaper La Repubblica.

“If negative shocks should worsen the outlook or if financing conditions should not adjust in the direction and to the extent that is necessary to boost the economy and inflation, a rate reduction remains in our armoury”.

His comments sent the euro down 0.5 per cent against the dollar to less than $1.13. The 10-year German Bund yield also dropped 3 basis points, below 0.2 per cent for the first time since last week’s ECB meeting.

“The comments from the ECB’s Praet and Draghi have exerted some pressure on the euro,” said Peter Dragicevich, a foreign-exchange strategist at Commonwealth Bank of Australia in London, “A drift back down towards $1.10 is more likely.

Mr Praet also entertained the idea of deploying “helicopter money” to stimulate inflation in extremis. “Yes, all central banks can do it” he said. “You can issue currency and you distribute it to people. That’s helicopter money.”

However he added: “The question is, if and when is it opportune to have recourse to that sort of instrument, which is really an extreme sort of instrument”.

The eurozone inflation rate fell back to minus 0.2 per cent in February, down from 0.3 per cent in January and well below the ECB’s official target of just below 2 per cent.

The ECB cut all three of its main interest rates last week and announced it would buy corporate bonds issued by companies in the single currency bloc that have an investment grade rating and are not banks.

He added that, despite the emissions tampering scandal this included Volkswagen. “As long as they have investment grade” he said. “You have corporate bonds in other sectors too, such as utilities, insurance, telecommunications, energy”.