Euro area price stability still at risk, ECB's Praet says
The risk still exists that the rise in inflation might stall if rate-setters are too hasty, the European Central Bank's chief economist said.
In remarks prepared for a speech in Bulgaria, Peter Praet said there were precious few signs of a "convincing" upward trend in 'core' inflation, especially because of subdued wage growth.
Furthermore, both the economic recovery and the outlook for stable inflation hinged on maintaining the current monetary policy settings - including the ECB's forward guidance - he said.
"And, second, the economic recovery and the outlook for price stability remain conditional on the very substantial degree of monetary accommodation, including our forward guidance. Without this support, the progress towards a sustained adjustment that we see in our projections will likely be slower or even stall," Praet said.
Nevertheless, the risks of deflation had been exorcised and monetary policy was now being effectively transmitted to the real economy.
Linked to the above, Praet emphasised that the economic recovery was broad in terms of countries while lending rates had also come down across the entire euro area.
Bank lending volumes had also recovered gradually since early 2014.
However, banks continued to have bloated cost structures which was hampeing their profitability, he said, and the lack of cross-border mergers meant the European banking system was still not unified with lenders too closely linked to their national economies.
Praet therefore called for the completion of the so-called 'banking union' in order to foster more cross-border M&A between lenders which, among other things, would also reduce the capital buffers asked of globally systemically-important banks in the region.