March 18, 2016 / 7:22 AM / 3 years ago

ECB could cut rates again if economy fails to pick up - Praet

FRANKFURT (Reuters) - The European Central Bank can cut interest rates again if the euro zone’s economy fails to pick up and, under extreme circumstances, it might even consider printing money and giving it out directly to people, its chief economist said in a newspaper interview published on Friday.

European Central Bank Executive Board member Peter Praet speaks during a meeting organised by The Economist in Cascais in this file photo dated February 18, 2014. REUTERS/Rafael Marchante

The ECB upset investors last week when its president, Mario Draghi, said he did not expect further rate cuts, raising questions about his pledge in 2012 to do “whatever it takes” to save the euro.

Markets have since stabilised and Draghi said on Thursday ECB rates would stay at current or lower levels for a long time.

The ECB’s chief economist, Peter Praet, said rates have not reached their lower limit, even if the ECB is aware of the negative impact that its negative deposit facility, effectively a charge on banks’ deposits with the ECB, has on lenders’ margins.

“As other central banks have demonstrated, we have not reached the physical lower boundary,” he told the Italian newspaper La Repubblica.

Praet added that if “negative shocks should worsen the outlook or if financing conditions should not adjust in the direction and to the extent that is necessary to boost the economy and inflation, a rate reduction remains in our armoury”.

Asked whether the ECB could simply print money and distribute it to euro zone citizens, an extreme form of policy easing first envisaged by U.S. economist Milton Friedman using the metaphor of a flying helicopter dropping money, Praet said this was a possibility, at least in theory.

“Yes, all central banks can do it,” Praet said. “You can issue currency and you distribute it to people. That’s helicopter money.”

He cautioned, however: “The question is, if and when is it opportune to have recourse to that sort of instrument, which is really an extreme sort of instrument.”

The ECB cut all three of its main interest rates last week and announced it would buy corporate bonds issued by euro zone companies that have an investment grade rating and are not banks.

Asked whether eligible issuers might include German car maker Volkswagen (VOWG_p.DE) while it struggles with the diesel emission scandal, Praet said: “Yes, as long as they have investment grade. You have corporate bonds in other sectors too, such as utilities, insurance, telecommunications, energy.”

He added: “We could buy something that is close to the index, but excluding banks, so that we avoid price distortions in the corporate bond market.”

Reporting by Christoph Steitz and Francesco Canepa; Editing by Kevin Liffey, Greg Mahlich

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