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ECB's Coeuré Says People Should Brace for Higher Interest Rates

3 Apr 2017 9:38 am
By Todd Buell and William Horobin 

Interest rates will rise again and firms, households and politicians must prepare for higher borrowing costs, a top European Central Bank official said Monday, putting the economy on notice that the days of ultra-low policy rates are numbered.

"It is clear that the financial sector and the economy and states should prepare for an environment of higher rates," said Benoît Coeuré at an event in Paris. Mr. Coeuré sits on the ECB's six-person Frankfurt-based executive board, which along with the 19 national central bank governors of the countries that use the euro sets ECB monetary policy.

The comments come as investors watch for signs that the ECB is preparing to end its very generous monetary policy. Critics say that strong growth numbers combined with recent sharp rises in inflation render the central bank's negative interest rate and bond-buying program inappropriate.

Still, the day of reckoning likely remains far off. The ECB hasn't yet discussed its exit from its bond buy program, Mr. Coeuré said and the central bank's chief economist said separately that the ECB's monetary policy remained appropriate.

Mr. Coeuré said the central bank's negative deposit rate was a good complement to bond buying, but cautioned that this couldn't last forever. "Negative rates were very effective but they shouldn't go on for too long as that penalizes the banking sector."

The central bank is unlikely to change policy soon, meaning that there will continue to be a significant policy divergence between two of the world's most important central banks. The Federal Reserve decided in mid-March to raise interest rates and policy makers there expect further tightening this year.

In an interview with Spanish publication Expansion, ECB chief economist Peter Praet said that data was making policy makers "more confident that the economic expansion will continue to firm and broaden." But he said that the ECB's accommodative policy was still needed to push inflation back to the ECB's medium-term target of just below 2%.

"We are now more optimistic on the economic outlook. Our monetary policy stance thus remains appropriate," he said.

Data published Friday showed inflation in the 19-country currency bloc slowed to 1.5% in March after 2% in February. The ECB targets inflation over the medium term at just below 2%. Core inflation, which excludes volatile items such as energy and food, fell to 0.7% from 0.9%, the data showed.

Mr. Praet added that the ECB had the option of being more expansionary in its policy, but conceded that "the probability of us having to provide more monetary accommodation to meet our objective has reduced considerably."

The ECB currently has interest rates at record low rates, with its main interest rate at 0% and its deposit rate at minus 0.4%. It is buying EUR60 billion ($63.90 billion) a month of mostly government bonds until the end of the year. The ECB announced the reduction of the bond purchase volume from EUR80 billion to EUR60 billion in December. Mr. Praet said in the interview that this cut didn't signal the start of a tapering of bond purchases.

The ECB's next policy announcement is due on April 27th. It will issue staff forecasts at its June 8th meeting, which will show expected path of inflation in the coming years.

Write to Todd Buell at todd.buell@wsj.com and William Horobin at William.Horobin@wsj.com

(END) Dow Jones Newswires

April 03, 2017 05:38 ET (09:38 GMT)

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