August 6, 2013 / 7:19 AM / 6 years ago

ECB has easing bias, not out of ammunition: Praet

FRANKFURT (Reuters) - The European Central Bank’s interest rates have not hit their lower bound and fresh cuts are an option, policymaker Peter Praet said, stressing the ECB’s “easing bias” after chief Mario Draghi left markets puzzled last week.

European Central Bank Executive Board member Peter Praet gives a speech during a meeting organised by the Grand Conferences Catholiques in Brussels January 14, 2013. REUTERS/Eric Vidal

Praet, who holds the influential economics portfolio on the ECB’s Executive Board, wrote in a column for policy research portal Vox that the ECB has “not run out of ammunition”.

His comments underpinned demand for most euro zone bonds, highlighting the readiness of at least some ECB policymakers to consider a fresh cut in interest rates as weak lending data offsets promising euro zone economic reports.

The Belgian generally leans towards the ECB’s dovish camp.

Draghi was guarded last Thursday when pressed on whether ECB policymakers discussed a cut at their monthly meeting, saying they only discussed forward guidance and were unanimous on that, although he noted rates had not reached the zero bound.

Praet, while stressing that “our forward guidance does not promise irresponsibility”, made clear that the euro zone’s central bank had further scope to act.

“Against the conditions that we see prevailing over a meaningful horizon, our guidance includes an easing bias,” he wrote in the Vox column, dated August 6.

“This conveys the notion that we have not reached the lower bound on our key interest rates,” he added. “We have not run out of ammunition. Further cuts in policy rates remain an option for the ECB if the outlook on price stability so warrants.”

Praet’s views carry weight because he makes a presentation on the economy at the beginning of Governing Council meetings that forms the basis of the policy discussion.

The ECB’s forward guidance, adopted in early July in a break with precedent, has proven only partially successful in calming markets and offsetting the fallout from the U.S. Federal Reserve’s plans to slow its massive stimulus program.

The key Euribor bank-to-bank lending rate rose again on Tuesday, shrugging off a one-day dip and extending an uptrend that took hold last month when ECB policymakers began qualifying their adoption of forward guidance.

The rise came despite the ECB keeping its official interest rates unchanged at a record low of 0.5 percent at its policy meeting last Thursday, and confirming they will remain there for some time to come and could fall further.

The apparent absence of a discussion about cutting rates last Thursday contrasted with the previous monthly meeting, when Draghi said the Council had an “extensive discussion” about a cut before deciding to hold.

Despite promising economic data from the euro zone, the ECB’s policy options are complicated by market responses to the Fed’s plans to halt stimulus that has fuelled asset prices.

The ECB reacted in July to market turmoil sparked by the Fed’s exit plan by offering for the first time forward guidance on the future path of its interest rates.

“The ECB’s forward guidance has contributed to more clarity over our assessment of the outlook and our reaction function,” Praet said.

“It also ensures that our monetary policy stance is not excessively vulnerable to shocks that are disconnected from the underlying economic and monetary conditions in the euro area.”

Praet said that the ECB sees the economy in need of loose policy for time to come.

“The Governing Council ... anticipates that economic conditions will remain such as to justify an exceptional degree of monetary accommodation (for an extended period of time).”

Writing by Paul Carrel; Editing by Catherine Evans

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