The European Central Bank will stick to its forward guidance of keeping the euro area interest rates at current levels or lower, despite economic improvements, as there is significant slack, the central bank's Executive Board member Peter Praet said on Wednesday.
"While staff forecasts gave us indications that we are gradually moving closer to 2 percent inflation over the medium term, we wanted to reassert our assessment that upside pressures to inflation will continue to be dampened by a large amount of economic slack, and by a weakened capacity of banks to create liquidity and credit for the economy," Praet said in a speech at the ECB and its Watchers conference in Frankfurt.
"Because of the significant amount of unutilised capacity, our monetary policy stance will remain as it is - with interest rates staying at the present or lower levels - even as we see improvements in the economy."
Regarding central bank communication, Praet said it was useful to strengthen the bank's communication during turbulent times. "By steering expectations more firmly, central banks' communication initiatives have had a stabilising effect, thereby enhancing the effectiveness of monetary policy," the policymaker noted.
"But to be effective, communication has to be followed by actual decisions, if and when the circumstances require them."
But such actions are only possible only when decisions are consistent with the ultimate objective and strategy of the central bank, Praet said. Else, the central bank risks inaction, or when it does act, it runs the risk of not meeting the objective, he said.
For a central bank to protect its credibility, Praet said it should steer clear of making unconditional commitments about future policy action, but by always emphasising the conditional nature of any guidance.
The ECB's mindset change regarding the publishing of minutes of Governing Council meetings was partly due to changed circumstances, Praet said. During uncertain economic times, he said it is important to reveal the internal debate in the rate-setting body.
"I would favour to convey the content of the debate and the balance of views of Governing Council members," he added.
Praet also stressed that it was crucial that the 18 governors continue to act in a personal capacity and remain independent in their decision-making.
"Communication - no matter how clear - only works if the communicator is credible," he said. "The ECB has a track record of following up words with deeds, and we intend to maintain it."
For comments and feedback: editorial@rttnews.com