Cheap Money Will Not Solve Problems: ECB Official

Loose monetary policy will not solve the euro zone’s structural imbalances and the ECB needs to focus on price stability to help rein in commodity-led inflation, according to incoming ECB Board Member Peter Praet.

European Central Bank
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European Central Bank

“You’re not going to solve these issues by a looser monetary policy,” said Praet, who is also the executive director at the National Bank of Belgium in an exclusive interview with CNBC.

“I think at a time when you have commodity price increasing, I think the biggest contribution is to try to keep that stability framework, which is the inflation expectation, solidly anchored.”

Praet dismisses the doom-mongers who predict the breakup of the euro and says the value of the single currency reflects market confidence in currency.

“Sometimes you read apocalyptic stories about the euro zone and then you see a currency which is very strong actually,” he said.

“You can read these things, you can read market comments, but when you look at figures, behavioral, like the currency, the external value of the euro, you don’t see that,” said Praet.

“I think in difficult circumstances the system has proven to be flexible enough to accommodate the shocks in the system, but keeping at the same time this longer credibility related to the anchoring of inflation expectations,” he said.

Praet is encouraged by the fact a number of euro zone banks have decided to raise capital ahead of the result of stress tests later this year.

“You see a high degree of differentiation, where an important part of the banking system is doing pretty well in terms of income, in terms of reinforcing equity,” Praet said.

So I would say, overall, the banking sector has improved, but you also know that there is a link that has to be reduced between the sovereign risk and the situation of the banking sector - some aspects of the banking sector - not as a whole,” said Praet.

“This remains an important question here. I have noticed that a number of banks have launched recapitalization processes. In different countries; different institutions are doing that today. I think it is a very encouraging process,” he said.