Euro-zone Stimulus

Low inflation still a threat, says ECB's Smets

Jan Smets, Governor of the National Bank of Belgium
Stimulating character. Source: Erik Luntang

Jan Smets, head of Belgium’s central bank, defended the European Central Bank’s decision to extend its purchases of euro-zone bonds to jump-start Europe’s economy. In an interview with Handelsblatt, Mr. Smets said the decisive issue was “whether inflation is sustainably aligned with our price-stability goals. In other words, with inflation close to two percent.”

Last Thursday, ECB president Mario Draghi announced the central bank will halve its monthly purchases of euro-zone government and corporate bonds to €30 billion ($34.8 billion). However, the bank didn’t set a definitive end date for the program, saying it would continue through September “or beyond, if necessary.”

Mr. Smets, who is also member of the ECB’s policy-making council, said the monetary infusion had contributed “substantially” to Europe’s economic recovery, but that the council believes that “sustainable inflation close to our price-stability goal continues to depend on strong monetary stimulus.” The decision to keep the program open-ended meant the ECB was keeping its options open to changes in inflation. “It shows we take our mandate seriously,” he said.

“Sustainable inflation close to our price-stability goal continues to depend on strong monetary stimulus.”

Jan Smets, Belgium's central bank president and ECB council member

In September, consumer prices in the euro zone rose by 1.8 percent, but the ECB clearly doesn’t believe this level is sustainable. The central bank forecasts inflation in the 19-member currency block will drop to 1.5 percent in 2017, 1.2 percent in 2018 and 1.5 percent the following year.

Even this modest pace of price rises was due to the ECB’s bond-buying policy, Mr. Smet said. “Without our actions, inflation would not be where it is today,” he added. But the central bank official is worried that the current extended period of modest inflation could depress wage demands – a key variable in the pursuit of economic growth. “We can’t be satisfied with simply keeping inflation close to our two percent goal,” the central banker said.

None of this is good news for European savers. Since March 2016, the ECB’s benchmark interest rate has been at zero percent, with the deposit rate for banks firmly in negative territory, at -0.4 percent. German savers’ organizations have repeatedly complained that negative interest rates after inflation are eating into savers’ assets, while banks and insurance companies say low interest rates severely undermine their business models.

Mr. Smets said it was impossible to say when interest rates would rise, even after the bond-buying ceases. He said only low rates now would allow higher rates in the future. “I understand that savers are concerned, but the current low rates help to support growth and bring inflation to where we want it,” he said.

The Belgian expressed his admiration for Jens Weidmann, head of the Bundesbank, Germany’s central bank, but stopped short of supporting him as a successor to Mr. Draghi in 2019. Speaking in Paris on Friday night, Mr. Weidmann refused to rule out a possible candidacy for ECB president in 2019, while also reiterating his well-known skepticism on the bond-buying program. “A clear end date would have been appropriate,” Mr. Weidmann said. “As you know, I am particularly critical of state bond-buying in the euro zone.” A substantial minority on the ECB board shared his views, he said.

Jan Mallien covers monetary policy for Handelsblatt in Frankfurt. Thomas Hanke is Handelsblatt’s correspondent in Paris. Brían Hanrahan and Jeremy Gray adapted this story for Handelsblatt Global. To contact the authors:,


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