FRANKFURT (Reuters) - The European Central Bank has room to cut interest rates further, Executive Board member Peter Praet said on Tuesday, adding that the central bank is paying “great attention” to euro zone inflation, currently below its target.
The ECB cut its main refinancing rate to 0.5 percent and kept its deposit rate a zero at its May policy meeting, but said it stood ready to act again should economic conditions require more stimulus. It kept rates unchanged in June.
But annual euro zone inflation at 1.4 percent remains far below the ECB’s target of below, but close to two percent and Praet said the discussion about interest rates at the ECB was “very rich”.
“There is room for action in the standard measures,” Praet said in a question and answers session at the Frankfurt School of Finance. “The discussion about standard (measures) is quite rich and quite interesting.”
Praet said the inflation rate was “on the weak side” and the euro zone economy was still in a fragile state, with growth risks to the downside.
“So is it an issue? It is a matter of attention, of great attention. Is it a matter of concern? I would say: we look at inflation expectations are very well anchored, but it is a matter of great attention, that is clear,” he said.
Praet, who is in charge of the economics portfolio at the 6-man executive board running the bank’s day-to-day business, talked about standard and non-standard measures in monetary policy, saying a central bank could cut the interest rate into negative territory.
“But the question of course, if you go into negative rates - which is not impossible conceptually - you have a very big difficulty there from an economic point of view, as the time value of money becomes negative,” said Praet.
“In exceptional circumstances all the instruments can be used ... When you talk about negative rates, it is part of the arsenal central banks can use,” he said
Praet added, however, that negative rates might have unintended consequences.
Reporting by Andreas Framke; editing by Ron Askew