ECB's Praet responds to criticism of low interest rates, calls for fiscal stimulus

A former top European Central Bank official criticised other veterans of the institution for their criticism of the Governing Council's recent decision to provide more open-ended forward guidance, potentially locking-in lower policy interest rates for much longer.

In an interview with Bloomberg, former ECB's chief economist, Peter Praet responded to the criticism of the council's decision by six former policymakers, in a memorandum signed on 4 October, including his two predecessors as ECB chief economist, Otmar Issing and Juergen Stark.

At its last policy meeting on 12 September, the GC said that official short-term interest rates would "remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2% within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics."

They argued against attempts to redefine the ECB's inflation target as 'symmetric', saying that low interest rates were starving savers and hence creating 'social tensions', leading to a zombie economy, financing governments and putting financial stability at risk.

"I can understand the frustration, but people should keep quiet, be calm," Praet told Bloomberg.

"The unconventional measures were previously viewed as relatively temporary. Now they are likely to stay in place for a very long period of time with possibly increasing adverse side effects," he said.

While Praet appeared to concede the possibility that the costs of a sustained period of low interest rates might increase over time, he said that the sometimes "not so well-chosen" words about policies that had yet to be decided reflected a "some deep malaise in the central-banking community".

The economist also labelled those criticisms "straw arguments".

He argued that central banks had a duty to help stabilise economic conditions and that the nature of the economic shocks buffeting the single currency bloc - including Brexit, trade tensions and growing protectionism - meant that "monetary policy probably won’t be a sufficient response".

Hence, like Draghi, Praet called for a fiscal boost.

"That means some form of coordinated policy response, which is of course difficult and controversial."