The European Central Bank could expand its policy toolkit if needed to battle deflation risks, a top ECB official said on Wednesday, adding that the central bank was also weighing measures to encourage more lending in the euro zone.
Peter Praet, a member of the ECB's executive board, said a deflationary spiral must be avoided in the crisis-stricken currency block and that deleveraging by the region's banks could hurt economic growth and push the inflation rate too low.
"We have an objective: price stability," Praet, who is in charge of the economics portfolio on the six-member board, said at the Peterson Institute for International Economics in Washington.
"If that objective is at risk, we have the possibility ... to expand the range of (monetary policy) instruments if we think it's necessary for that objective," he said. Praet declined to elaborate on what type of instruments might be considered.
With the euro zone economy stuck in recession, the ECB cut its main refinancing rate to a record low of 0.5 percent and extended its provision of unlimited funds to banks by a year at its May policy meeting.
Inflation in the currency bloc fell to a three-year low of 1.2 percent in April, far below the ECB's goal of just under 2 percent.
A deflationary spiral would entail a self-reinforcing cycle of falling prices and wages - a central banker's nightmare as such situations are very difficult to combat.
Despite the ECB's record-low interest rates, banks have been relatively reticent to make loans in the region's periphery, where the crisis remains more acute.
Getting banks to lend more has taken on "particular prominence" in the ECB's current strategy process, Praet said.
One way to do this would be by improving transparency in the market for asset-backed securities, or ABS, to make them more attractive to investors, Praet said.
If banks were able to package their loans into ABS and sell them to other banks, that could help the economy by freeing up more capital at the banks for lending.
ABS trading seized up after the often-complicated and hard-to-value financial instruments took much of the blame for the financial crisis that brought down U.S. investment bank Lehman Brothers in 2008, helping spark a global recession.
The ECB recently set up a task force with the European Investment Bank to assess ways to unblock lending to small- and medium-sized businesses, including promoting a market for ABS based on loans for smaller firms.
"If you force ... standardization of information on loans, you act as a facilitator for a market," Praet told reporters.
The ECB recently introduced new rules requiring banks that use ABS as collateral for their loans provide a full breakdown of what is included in each security bundle.