Tuesday, December 30, 2014

Bloomberg News - ECB’s Praet Warning of Oil Effects Signals Higher Chance of QE

European Central Bank Chief Economist Peter Praet warned in an interview with Boersen-Zeitung that lower oil prices increasingly risk de-anchoring inflation expectations, indicating that quantitative easing is becoming more likely.
Euro-area inflation will drop below zero “for a longer period” in 2015 amid a slide in the cost of crude, and the Governing Council “cannot simply look through” that, Praet said in commentspublished yesterday by the German newspaper. Inflation expectations are currently “extremely fragile” and the danger of second-round effects is “higher than usual,” he was cited as saying.
ECB policy makers are preparing to consider a proposal for large-scale asset purchases, including sovereign bonds, when they meet on Jan. 22. While Executive Board member Benoit Coeure has said that there’s broad consensus for new stimulus, officials including Germany’s Jens Weidmann have railed against the risks quantitative easing would entail.
The impact of oil prices, which have fallen by about half this year, was underscored by Spanish inflation data yesterday. Consumer prices slid 1.1 percent in December from a year ago, worse than forecast and the biggest drop since July 2009.
Praet said the ECB must “not be paralyzed” by the problems a QE program might create. Sovereign bonds are “the only kind of asset for which there is a significant market volume,” he said.
One sticking point in the debate is how to treat the risk of buying bonds of stressed nations. The prospect of renewed political turmoil in Greece, the country that triggered the debt crisis in 2009, has risen as snap elections in a few weeks could put anti-austerity party Syriza in power.
The rise of political parties opposed to structural adjustments is a “warning signal,” Praet said. “Populists in some countries promise fast and simple solutions but their proposals would be a complete disaster.”
To contact the reporter on this story: Jana Randow in Frankfurt at jrandow@bloomberg.net

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