ECB's Praet says debate on higher euro area growth potential now open

The need for monetary policy in the euro area to be tightened may be less than had been thought as the bloc's if the bloc's potential rate of growth is improving, a top European Central Bank official said.

In an interview with Reuters, ECB chief economist Peter Praet said the degree of unexploited capacity in the Eurozone, especially in the jobs market, may be greater than thought.

By extension, that higher rate of potential growth would mean the economy's 'speed limit', or ability to grow without generating undue price pressures, was higher.

"Other things being equal, it would [mean a] shallower [inflation path]," he reportedly said.

"Mario Draghi was opening the conversation on the possibility that there may be more slack in the economy [...] That still needs to be confirmed but we already have strong evidence of a strong labor supply reaction."

Praet also pointed to more women, elderly workers and qualified labor from Central Europe as another potential explanation behind the increased supply of labour, which in effect increases the potential rate of growth.

Despite the above, according to Praet the ECB would eventually need to be more clear in its guidance for the expected path of interest rates.

That was because it would eventually bring its asset purchases to an end, so rate-setters' commitment to keeping rates steady until "well past" the end of purchases would suddenly loom large.

However, Praet cautioned against the ECB revising its guidance "too early", which might send a wrong signal about the expected end-date for asset purchases.

In any case, he added, those were "intended to run until the Governing Council sees a sustained adjustment in the path of inflation.”

The chief economist also appeared to indicate that bond purchases would not come to a sudden stop.

"So people can judge what is coherent with a notion of prudence and could conclude that we will gradually bring net asset purchases to an end once the Governing Council sees a sustained adjustment path. I think it is well understood by the market."