"Not even allow deflation" Ewald Nowotny / Link {
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The fears of deflation are not exaggerated, says OeNB boss Ewald Nowotny. The ECB must act now
Default: If the current price drop already a reason for the European Central Bank (ECB) to take action?
Ewald Nowotny: No. Monetary policy actions should be based on medium-term prospects. Monthly results are not decisive. But the latest figures were a further indication that inflation perspective is significantly lower in the euro area is currently under the objectives of the ECB. And that's a problem.
Default: Why?
Nowotny: We were the ECB's primary objective of maintaining price stability. Achieved is by our definition with an inflation rate of not more than, but almost two percent. Too low inflation is the danger of slipping into deflation. The two-percent mark is to ensure that we have the buffer. The problem for a central bank is always that inflation can fight much easier than deflation. At extremely rising prices have to put up interest rates. Although this leads to a recession, but inflation can fight each other. Deflation must be countered with lower interest rates. But a central bank can total lending rate at which banks can take their loans, do not make negative. The scope of the central bank is here so much more limited. That is why it is so important not only allow deflation.
Standard: What makes a deflation so dangerous?
Nowotny: A decrease of unit prices may be positive. A drop in price across the whole economy is problematic as it may lead to so that the sales are decreasing in an economy. Declining sales affect investment behavior and press the income development. In addition, deflation specifically means that the real burden of debt and the real interest rate increase, which in turn suppresses the growth.
Standard: Your Exkollege, the German economist Juergen Stark, is of the opinion in Europe deflation paranoia will stoked. Japan it was in the past 15 years not fared badly, despite a mild deflation.
Nowotny: I do not believe that such a development as in Japan, so a long-term stagnation, a useful perspective for Europe would be. In Japan, the low growth has not been reflected in massively higher unemployment. Because in Japan falls by the demographic development, labor supply, and the country has a closed labor market . In Europe, this is completely different: Here, a stage of a long stagnation to a massive increase in unemployment would lead to what we see now, unfortunately. With all the massive social and political effects.
Standard: Can the ECB do something about the threat of deflation?
Nowotny: monetary policy alone is a weak lever, but a necessary, though not sufficient, condition for economic recovery. What that means is I think it's a good idea to make something of monetary policy. In contrast to the other major central banks to the ECB balance sheet shrinks currently, because banks pay back their loans to us tend to. If the central bank thus does nothing, this would amount to a de facto monetary tightening same. We should at least achieve neutral effects.
Standard: Discussed is currently the purchase of government bonds by the European Central Bank. This is intended long-term interest rates down and lending in Europe are encouraged. Would such an action in your opinion useful?
Nowotny: In order to make monetary policy more neutral as mentioned, there are several possibilities. One is new lending programs for banks. Such a program we launched in the autumn of 2014 it was recorded but comparatively weak. Another possibility is that the ECB buys active market securities. For some programs have also been started. The third step would be to expanding this program to purchase other assets, so for example on corporate bonds and government bonds. This moves the current debate in the ECB.
Standard: A critique of the plan is that if the ECB buys Greek and Italian government bonds, it operates States financing. So she takes the pressure for reform of the crisis countries.
Nowotny: The purchase of government bonds is a traditional instrument of central bank policy. To avoid the dangers of direct government financing, the purchase of the corresponding secondary markets would take place, we would not directly purchase from the States. It is controversial to what extent the ECB shall make such purchases and who bears the risk. This can be a shared risk with the ECB. But this can also be a risk borne by the individual banks themselves. But this discussion is still ongoing.
Default: If the ECB says she wants to ensure that inflation in the euro area as a whole is increasing, not everyone will benefit. In Austria inflation is at 1.7 percent. For Austria it's absurd to be active.
Nowotny: We are in Austria safely in a slightly different location. The inflation rate is higher, unemployment is lower than the average of the euro area. The monetary policy must clearly apply to the entire euro area. But there is a strong interdependence between all Member States. It is also for Austria that exports to countries who are stuck in stagnation, are declining.
Standard: Is there not a risk that inflation climbs in Austria by possible ECB intervention via the two-percent mark?
Nowotny: The development in Austria is caused by special effects. Partly due to fee increases, partially offset by a stronger inflation in services. I do not think we have long to expect a higher rate of inflation. On the contrary, the forecasts assume that the inflation rate back in 2015.
Standard: Where exactly is the point in trying to push lending rates even more? In Austria, companies already record-low interest rates on loans. In Spain and Italy the conditions are per se not so bad. Many economists say the real problem is the lack of demand for credit.
Nowotny: Of course, the really important point is the demand side. Where there are different aspects of it. Large companies have currently probably no problems with financing. It is different from most small- and medium range. The ECB measures must also be seen in nexus with the plan of EU Commission President Jean-Claude Juncker to stimulate investment. (The Juncker Plan builds on this by initiating public spending, private investment. If we are to succeed, interested entrepreneurs have come to cheap loans, note.)
Standard: Germany rejects the government bond purchases. How great is the danger of division in the ECB?
Nowotny: Everyone has an interest that a common procedure possible results of the ECB. This applies to both ECB President Mario Draghi and for President Jens Weidmann of the German Bundesbank. That's why the talks are still.
Standard: Convert already next week with a decision.
Nowotny. I personally believe that it would be useful to come sooner rather than later to a decision. There are all sorts of speculation in the markets, and I believe that a central bank should as soon as possible to give clarity on their strategy. (Szi, THE STANDARD, 01/14/2014)
Ewald Nowotny Governor of the Austrian National Bank and a member of the Governing Council of the ECB interest rate policy committee.
