ECB's Constancio (Portugal): Asset purchase program will continue to grow until we see an adjustment in the inflation path - comments from Berlin
- lack of demand holding back recovery
- policy rate to remain low for prolonged period; reiterates ready to act to deliver on mandate
- would be a mistake to divert monetary policy from its objective of maintaining price stability to more directly address asset price misalignments and financial stability risks.
- in the past months, downside risks to the global economy have increased, due notably to the increasing weakness in emerging markets.
- There are several reasons why excessively low inflation generates relevant risks for the economy. First, with monetary policy rates at their lower bound, lower inflation rates imply higher real interest rates; in particular the real interest rate may end up above the equilibrium value needed to match savings and investment at the full employment level. Second, very low inflation may lead to an un-anchoring of inflation expectations. This would imply second-round effects on price and wage setting protracting the subdued price developments into the future. Third, low inflation increases the debt burden of borrowers, obstructing the needed balance sheet adjustment of highly indebted households, firms and governments. Fourth, should a generalised deflation pressure prevail, nominal rigidities in the economy, and particularly in labour markets, could inhibit the needed relative price adjustments. Finally, all empirical studies show that there is a positive measurement bias in the measurement of price developments, which implies that a zero inflation rate would mask actually declining prices.