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ECB to keep interest rates low as European economy revives, says central bank official

By Jeff Black

The European Central Bank will keep interest rates low as the economy picks up because the region’s economic output is still below potential, according to Executive Board member Sabine Lautenschlaeger.

“The output gap we acknowledge by our forward guidance,” Lautenschlaeger said in an interview in the Wall Street Journal. “Interest rates will remain at the present level, or even lower, over a longer period of time and well into the recovery.”

The comments represent an extension of the Frankfurt-based ECB’s pledge on interest rates, known as forward guidance, and distill arguments made by President Mario Draghi last week for the first time. Even as output data improve in the 18-nation region, the ECB is signaling it won’t tighten monetary conditions too soon and choke off the recovery.

“We’re receiving some positive signals from incoming data, for example economically with a modest recovery trend and financially with improving funding conditions for banks,” Lautenschlaeger said, adding that the central bank still has measures it can use, like asset purchases or negative interest rates, to stimulate growth.

After the ECB kept its interest rates on hold on March 6, Draghi said that while policy makers hadn’t seen a need to act now, they agreed that monetary conditions need to remain loose as the recovery grips, “because of the existing slack in the economy.”

While the recovery remains fragile, data in the past four weeks have been encouraging. Gross domestic product in the bloc climbed 0.3 percent in the fourth quarter, more than economists predicted and bolstered by stronger expansions in Germany, France and the Netherlands. Italy also returned to growth.

Economic forecasts released by the ECB last week, which covered 2016 for the first time, predicted that inflation should be around 1.7 percent by the end of that year. That’s near the central bank’s goal of just below 2 percent and more than double last month’s rate of 0.8 percent. It projected growth will firm to 1.8 percent in 2016 from 1.2 percent this year.

“We’ll act if it is necessary,” Lautenschlaeger said. “But there was no strong reason to act: Last week we, the Governing Council, found our baseline scenario broadly confirmed.”

[Bloomberg]

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