European Central Bank Governing Council member Ignazio Visco said policy makers are determined to act if inflation is forecast to remain below the central bank’s target of just under 2 percent over the next two years.
“This is not consistent with our definition of price stability,” Visco, who is also governor of the Bank of Italy, said in the text of a speech delivered today in Rome at the central bank’s annual meeting. “If this pattern is confirmed the Governing Council is determined to act, even with unconventional policies.”
ECB officials are scheduled to meet on June 5 to set monetary policy. Mario Draghi, president of the Frankfurt-based institute, said earlier this month that the Governing Council was “comfortable” taking measures to boost inflation in the euro area. The policy makers are unanimous in their commitment to pushing up prices, Draghi said on May 8.
Consumer-price increases in the euro region have been less than half the ECB’s goal of just under 2 percent since October. Draghi said May 26 in Portugal that policy makers need to be “particularly watchful” of low inflation as it can lead to higher-than-expected debt burdens and prompt lenders to tighten their credit standards.
Low inflation is particularly harmful when debt is high and and the economy is sluggish, Visco said. Italy is still struggling to recover from a recession, he said.
Visco emphasized his call for price vigilance by comparing the risks of low growth to the damage done by excessively high rates of inflation 20 years ago.
“Excessively low inflation must be countered with equal firmness, also to prevent it from being incorporated into medium-term expectations,” Visco said. “The formation of expectations is not a linear process: even large changes can materialize very quickly, discontinuously.”
Ninety percent of economists in the Bloomberg Monthly Survey predict the ECB’s council will reduce interest rates in June. Most forecast a cut in both the benchmark rate, now at 0.25 percent, and the deposit rate, which is at zero. That would make the ECB the first major central bank to charge for holding lenders’ excess cash overnight.
Just 8 percent of the economists expect a decision on asset purchases. While Draghi has said that is an option, ECB officials have so far refrained from the quantitative-easing programs conducted by the Federal Reserve, Bank of England and Bank of Japan.
The euro region is going through an uneven recovery this year, with economies from Netherlands to Italy contracting in the first quarter.
The lack of growth in Italy since the onset of the financial crisis has sapped household savings and had “a heavy impact” on employment levels, Visco said. Any persistence of high unemployment in Italy risks eroding the skills that the jobless need to return to the workforce, he said.
Industrial output unexpectedly fell in March, contrasting with signs of optimism in recent surveys and contributing to a decline of 0.1 percent in gross domestic product in the first quarter. GDP had risen in the last three months of 2013 after nine consecutive quarters of decline.
“A real recovery is struggling to get under way,” Visco said. “The gradual improvement in expectations has been slow to translate into a solid upturn in economic activity.”