GO
Loading...

WRAPUP 1-OECD urges ECB to buy euro zone assets to revive economy

Robin Emmott and Eva Taylor
Tuesday, 19 Nov 2013 | 7:16 AM ET

* OECD says EU should buy bonds to counter deflation risk

* ECB's Praet says no deflation risk visible

* Asmussen says ECB ready to move again if inflation undershoots

BRUSSELS/FRANKFURT, Nov 19 (Reuters) - A leading international think-tank urged the European Central Bank on Tuesday to loosen the purse strings further and buy euro zone government and corporate bonds to accelerate a weak recovery.

One of the bank' hawks, Joerg Asmussen, said separately that more action was possible, but only if deemed necessary.

The Paris-based Organisation for Economic Cooperation and Development (OECD) called on the ECB to emulate U.S.-style quantitative easing (QE) to help the single currency area avoid a Japanese-style deflationary spiral.

"Risks of deflation may be slowly increasing," OECD chief economist Pier Carlo Padoan told Reuters. "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 percent in October, prompting the ECB to cut its key interest rate to a record low 0.25 percent this month. The euro zone economy is struggling to recover from its longest ever recession which ended in mid-year.

In an Austrian radio interview, ECB executive board member Joerg Asmussen, a German, 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 percent.

"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 told public broadcaster ORF.

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.

He 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 put the possibility of QE 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 Euro Finance Week conference in Frankfurt.

TO EARLY

Asmussen reiterated the ECB's stance that it is still to early to exit from the ECB's loose monetary policy.

"Our monetary policy will remain expansionary for as long as needed," Asmussen said.

Praet raised the possibility of QE in a Wall Street Journal interview last week, saying the central bank could use its balance sheet to prevent inflation under-shooting.

"This includes outright purchases that any central bank can do," he said, without drawing any public contradiction from ECB hawks.

German Bundesbank President Jens Weidmann led a minority of about a quarter of the ECB governing council members who opposed the November rate cut, a source familiar with the decision said.

Another ECB source said the dissenters would have been willing to back a rate cut in December that might have included further monetary easing by ending a policy of "sterilising" past ECB purchases of euro zone government bonds under the now defunct securities market programme.

That could potentially free up another 200 billion euros of liquidity which the bank currently withdraws each week to compensate for purchases of Greek, Portuguese, Irish, Spanish and Italian bonds in 2010-11.

Praet acknowledged on Tuesday that growth was fragile, inflation low and credit subdued. "Things are improving, but it is still a fragile environment," he said.

The U.S. Federal Reserve, the Bank of England and the Bank of Japan have all resorted to QE to revive economic growth since the global financial crisis struck in 2008 but such measures are extremely divisive among the 23 members of the ECB's Governing Council.

An economist at Germany's ZEW economic research institute said the ECB's Nov. 7 interest rate cut was seen as a signal of problems in the economy and led to a worsening of the ZEW current situation indicator.

Michael Schroeder said expectations improved slightly after the ECB cut rates to a record low but expectations for the banking sector deteriorated significantly after the move.

But a bank economist said a shift to a QE policy would be a game-changer for the euro zone.

"Should the ECB really go down the route of buying government bonds, it would be transformative," said Greg Fuzesi at JP Morgan in London. "It would change perceptions of where the euro area is heading and could have a huge effect on the outlook."