FRANKFURT (Reuters) - Lifting euro zone inflation may be more difficult than earlier expected, European Central Bank Vice President Vitor Constancio said on Friday, days before the bank begins a much anticipated discussion on the future of its stimulus policy.
With inflation already missing the ECB’s target of almost 2 percent for more than 4-1/2 years, a further delay could fuel arguments for a prolongation of ECB stimulus, even as the 19-member currency bloc’s economy is enjoying its best upswing since before the global financial crisis.
“The growing uncertainty surrounding the strength of the world economic recovery, and of the U.S. in particular, makes the normalisation of inflation and unemployment levels in the euro area more difficult,” Constancio told a conference in Cernobbio, Italy.
“The strong worldwide reflationary phase that seemed likely at the beginning of the year has not materialised,” Constancio said during the bank’s week-long quiet period ahead of its rate decision. “Therefore, the tasks of normalising inflation and unemployment to acceptable levels continue to be difficult.”
Central bankers are concerned about low inflation because weak levels risk an economy falling into deflation should there be a sudden shock to growth.
Constancio also warned of a risk of a sudden rise in market volatility and tightening of financial conditions, despite relatively robust global growth.
“Financial conditions may nevertheless deteriorate suddenly, due to developments in the U.S. or emerging economies’ or to geo-political risks that can trigger spikes in a situation of prolonged low volatility,” he added.
The ECB’s 2.3 trillion euro bond buys, aimed to revive inflation, are set to run until the end of the year and policymakers promised to decide this autumn whether to continue the scheme or start winding it down.
While conservative policymakers have argued for an orderly but relatively quick exit, doves warn that inflation, the bank’s primary mandate, will miss its target for years to come, a delay potentially exacerbated by a rapid end of quantitative easing.
Weighing in on this debate, Austrian central bank chief said a discussion about careful exit is valid.
“The question is not whether we should hit the brakes abruptly,” he said on Friday. “But it’s how to initiate normalisation carefully. This is the sensible discussion.”
“There needs to be caution, the longer (easy) policy stays, the greater the side effects become,” he added.
Nowotny also said that the euro’s rise against the dollar, which has worried some of his colleagues, should not be dramatized or over-interpreted.
Reporting by Balazs Koranyi and Kirsti Knolle; Editing by Jeremy Gaunt