ECB’s Praet tried to inject another dose of dovishness - Rabobank

Stefan Koopman, Market Economist at Rabobank, notes that in a speech in Rome that mainly focused on the risks and costs of too-low inflation, ECB chief economist Peter Praet tried to inject another dose of dovishness into markets. 

“Even though the half-life of these shots tend to be shorter by the day, one of the key passages in the text was the following: “When we established our [inflation] objective of 2% [...] we assumed a real equilibrium interest rate of 2% on average, which may well be lower today given the evolution of the secular and cyclical forces since then. In that context, if real rates were to continue their trend decline and inflation were to settle lower as well, nominal interest rates could well be considerably lower over future cycles. The central bank might then have to resort to unconventional measures more frequently to fulfil its mandate”. 

In other words, unless the long-run growth potential of the euro area suddenly improves radically, which we don’t see happening, we can expect more QE and other unconventional measures in the (near?) future to avoid a downward re-anchoring of inflation expectations. But, hey, Rome wasn’t built in a day either.”

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