More Eurozone QE is needed says euro central banker

September 21, 2015 09:35 AM

The European Central Bank should be careful not to fall behind the curve in its efforts to revive the euro zone economy as risks to growth and inflation mount, the Bank of Italy's top economist said on Monday.

The ECB cut its growth and inflation forecasts earlier this month, citing lower commodity prices and turbulence in emerging markets, and said it is prepared to ramp up its €1 trillion ($1.13 trillion) asset-purchase program if needed.

Eugenio Gaiotti, chief economist of the Bank of Italy, said the main danger for the ECB would be being too slow in reacting.

"We assess that downside risks for medium-term growth and inflation have increased," Gaiotti said in an interview with Reuters.

"We are careful not to react prematurely to recent market and global movements, which can be short-lived, but at this juncture I would consider mostly important not to fall behind the curve."

Euro zone inflation was a meager 0.1% in August, compared with an ECB target of almost 2%, and rate setters have already warned that some negative prints are on the cards this year.

The ECB's failure so far to revive inflation in a significant way is raising questions about the effectiveness of central banks' tool of choice over the past few years - the purchase of assets - against structural challenges such as a maturing Chinese economy and an aging and uncompetitive Europe.

Gaiotti acknowledged that monetary policy had its limitations but argued central banks still had a role to play in countering the current global economic weakness.

"Monetary policy cannot permanently guarantee strong and lasting growth, but the weakening global economy calls for a decisively supportive monetary stance," he said.

"It is crucial to avoid lower potential growth igniting a deflationary spiral, and this falls fully in the mandate of central banks."

He added an easy monetary policy also smoothes the introduction of structural reforms needed to improve economic competitiveness.

The prospect of a rate hike in the United States, with an ensuing tightening in global dollar liquidity, has played a key role in a slowdown in emerging economies this year.

The Fed eventually held off hiking rates last week, raising questions over how it will ever manage to lift them off the floor.

Gaiotti said central banks need to consider the global implications of their policy decisions.

"One should not forget that years of ultra-low rates have been necessary to avoid a global economic disruption and much worse international spillovers," he said.

"(Central banks) obviously cannot ignore the risk of global spillovers, which have domestic repercussions and are currently particularly relevant," adding that the timing of any rate move needed to be calibrated and communicated carefully.

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Francesco Canepa, Reuters