Following are excerpts from a CNBC interview with Julia Chatterley and Ewald Nowotny, ECB Governing Council Member and Governor, National Bank of Austria
JC: Governor, thank you so much for speaking to us. I want to start by talking about the inflation target- specifically for 2018. Inflation at that point still significantly below the ECB's target. Is that a concern for the bank?
EN: The forecast we have is that in 2017 we will have, a forecast, we will have inflation at about 1.7% which is not that far away from the 2% line. So basically, and I think this is the important point, we will have still very low inflation this year but we think that in the next year already we will have quite a substantial pick-up in inflation which of course changes a lot with regards to the general perspective we have.
JC: So you are saying if things pan out as expected you've done enough?
EN: Yes, as you have seen, we decided yesterday not to make any new movements. Of course, with inflation, we are all aware, that the main mover are the oil prices so this increase in inflation rate is mainly due that we expect no major decline in the oil price so it's just already the base effect, that means that we would have high inflation. Of course the oil price is also a very political price and not so easy to predict but this is our best guess and so given these circumstances, I think that already in the second half of this year we will have a clear upswing in the inflation rate.
JC: Do you think the risks to the oil price, based on your current targets, is to the upside?
EN: Well even if it is remaining constant, the base effect will automatically mean an increase in the inflation rate. It is very difficult to predict but many experts and you know we have had yesterday already also an OPEC meeting here in Vienna – see an oil price of about $50 a barrel – has, let's say something, another solid expectation.
JC: Do you think your estimates for oil are conservative?
EN: Conservative with regard to the base effect of the oil price. We do see of course a number of additional geopolitical risks in some of the emerging countries. There is of course also this Brexit discussion but basically I think we are more on the conservative side.
JC: And what about for euro as well because your estimate there is higher actually than current market pricing. Do you see yourself being conservative on that too?
EN:As a central bank we never really have a clear forecast on exchange rates so this is just a technical assumption – this is not a material forecast.
JC: Because there were some out there yesterday that were saying that actually you're playing down the inflation forecasts and this is being political in a sense because you want to give yourselves room for future stimulus but you also want to justify the stimulus that is still yet to kick in. How do you respond to that?
EN: We try to do our best to have a serious and reliable forecast – no political side or alliance with that. Of course we have set a number of actions. Some of them will kick in only the later date, so the most important is the new line of loans for investment and we think that really might have quite some substantial effect because it's a very [INAUDIBLE] conditions so there are a number of effects that still will need time to show and this is exactly the basic idea behind the yesterday meeting that we will allow time needed to bring the results.
JC: But if we just look at your inflation forecast, can I just confirm that all the stimulus you have announced including and the corporate bond purchases programme, the impact of that is factored in as best you can into these forecasts?
EN: Well of course, in that way that we know we have sent these signals but they still need time, to show their full effectiveness. And I think this is especially because this latest expansion move will kick in only in two weeks' time so therefore it's much too early to say that these effects are only now, but we are quite sure they will have substantial effects in the near future.
JC: At what point will you look again at current policy and look at the development of inflation and go actually we need to calibrate policy here or at least send a signal about the end of QE in March 2017?
EN: Well we have of course our regular policy sessions and these policy sessions we will have again. We will have a forecast, we will have an economic analysis and we are free to move at each one of these sessions but basically our approach is a steady hand approach so also this is something that might give increased credibility, increased stability to the markets and I think it's too early to say that we have now reached a turning point so that now on things will move in the right direction. But there are signs in this way.
JC: At what point will you look again at current policy and look at the development of inflation and go actually we need to calibrate policy here or at least send a signal about the end of QE in March 2017?
EN: Well we have of course our regular policy sessions and these policy sessions we will have again. We will have a forecast, we will have an economic analysis and we are free to move at each one of these sessions but basically our approach is a steady-hand approach so also this is something that might give increased credibility, increased stability to the markets and I think it's too early to say that we have now reached a turning point so that now on things will move in the right direction. But there are signs in this way.
JC: I track the themes of the last 200 years and look at a snapshot of what we're dealing with today and actually I see a lot of frequency and alot of recurrence of similar themes. What can we learn from what's happened over the last 200 years and what we face today? What should we have learned?
EN: Well of course the first big lesson is nothing is as horrible, both on the human side and the economic side, as war. Wars, we had Napoleonic wars, the First World War, the Second World War all had extremely negative effects also on the monetary system. The second point is that both in good times and in bad times it is important to have an independent central bank because the whole monetary system has to be built on trust. And so to have this independence is a very important element of trust in this system. And I think that third aspect is that, of course, even given this independence of central banks, central banks cannot act in a totally isolated way. So we have to have cooperation we have to see the relationship with the other economic players. So as we see now, we can't be the only game in town and this is also something that is of relevance today.
JC: I'd pick up on the trust point and the independence, because you could argue actually the ECB is in many ways under attack today if we look at comments that have come out from Germany in particular and the role of monetary policy in fueling populism. We need to take a step back don't we and understand actually what the ECB is trying to achieve here?
EN: Yes but first, one has to be aware, the ECB is the most independent central bank of the world, because independence is something that has to be enshrined legally. For a national central bank, national laws can be changed and you are aware we have such a discussion in the U.S., we had such discussions in other countries. The dependence of the ECB is enshrined in the EU treaty which as you know is very difficult to change and especially this element of central bank independence clearly is not to be changed at all. It would lead to public referendum in all countries of the EU member states.
So, that means our legal independence is the best worldwide. Still, I think it is important for the ECB also to have close contacts and to inform the public and of course inform the parliaments – the elected representatives – what we are doing to explain why we are doing it. This is a permanent mission we have and I think we are trying and President Draghi is investing quite a lot of his time, especially in this task of informing the public about the reasons and why we do this.
JC: Do you think you're getting the communication right?
EN: I think we do what we can and it is sometimes a difficult discussion but it has to be done and I have to say, as Austrian, I am a neighbour of Germany and I follow the discussion in Germany and Germany is the biggest economy in the euro zone and in the EU. It is very important to have a constructive dialogue. Also in this country, even if there a lot of critical voices, you have to take them seriously. This doesn't mean that you have to give them all reason and I think there are many, many aspects why it's not really reasonable but you have to enter into a, let's say, serious debate which means you have to also find some counterparts for the serious debate.
JC: Compromise is the key word
EN: Not really. I think in monetary policy, it's not really about and in many cases it can't really be about compromise. I think the central bank, if she is convinced she has to do something, can't compromise – we have to do our thing.
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