ECB chief economists argues for patience, persistence

Economic prospects have brightened but it is too soon to draw back on forward guidance and quantitative easing, the European Central Bank's chief economist said.

In remarks prepared for a speech on Tuesday, Peter Praet spoke at length about the importance of both the ECB's forward guidance and asset purchases in anchoring expectations for short-term interest rates and incentivising lending.

Speaking at the Fixed Income Market Colloquium in Rome, Praet said "our mission is not yet accomplished. We need patience and persistence. We need to be patient, because inflation convergence needs more time to show through convincingly in the data.

"The euro area’s economic environment is improving, and the fat negative tail to inflation expectations, which was so visible at the start of our asset purchase programme, has virtually disappeared."

However, the the ECB's so-called baseline scenario for future inflation was "crucially" contingent on very easing financing conditions which, to a large extent, hinged on staying the course with the current accomodative monetary policy stance, he said.

Indeed, measured inflation remained exceedingly volatile, Praet added, and underlying inflation subdued.

The ECB's chief economist was referring to the statistically implied probability of deflationary outcomes in the Eurozone as per the options on five-year zero-coupons.

On the plus side, better economic prospects would make borrowing more attractive by raising companies' expected returns.