Weak Inflation Draws ECB's Watch

By Christopher Lawton

FRANKFURT---Weak price pressures in the euro zone are extending into the medium term, the European Central Bank's top economist said Saturday, pledging to act, should the ECB see the need.

"We admit that the pressures on prices are weak, and that this weakness in price development is extending into the medium term," Peter Praet, an ECB executive board member told Expresso, a Portuguese newspaper, in an interview released by the ECB on Saturday.

The ECB's mandate requires the bank to maintain price stability, defined as inflation just under 2% over the medium term, but inflation in the euro zone is currently at 0.7%. The ECB held all of its key interest rates steady when it met earlier this month, despite the recent weakening in inflation. But at his monthly news conference, ECB President Mario Draghi signaled that the bank may act as early as March.

Price pressures are "quite weak" at the moment, Mr. Praet admitted, but said the ECB sees no risk of deflation, defined as a persistent downward trend in prices that threatens consumer spending, wages, business profits and investment.

Going forward, the ECB has tools at its disposal and will use them if necessary, Mr. Praet said. Large-scale asset purchases, known as quantitative easing, and taking its rate on overnight bank deposits into negative territory are among the unconventional options that ECB officials have discussed publicly.

"If our mandate is at risk, we will act without hesitation," he said in the interview.

Mr. Praet added in the interview that Germany's highest court was right to refer the case to determine the legality of the ECB's bond buying program to the EuropeanCourt of Justice.

"The case was referring to the European Court of Justice, which the ECB deems to be a good decision," Mr. Praet said.

Germany's Constitutional Court said this month that the ECB's Outright Monetary Transactions program may have exceeded the central bank's mandate, before it passed the case onto the European Court of Justice in Luxembourg. The German court reserved the right to later decide whether the Luxembourg court's opinion is in line with German law.

Independently of the court case, the OMT program still exists, Mr. Praet said

"The instrument is there. For us nothing has changed," he added.

Write to Christopher Lawton at christopher.lawton@wsj.com

(END) Dow Jones Newswires

February 22, 2014 07:31 ET (12:31 GMT)

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