ECB vice president makes vocal defence of Thursday's policy actions

Rate-setters in the Eurozone made a vocal and atypical defence of their policy decisions taken on the previous day, amid some observers’ scepticism regarding the effectiveness of the moves.

Writing on the European Central Bank’s website vice President Vitor Constancio pointed out that the room for manoeuvre on government spending in the single currency area was limited by legal considerations, in allusion to the limits imposed by Brussels.

“Active stabilising fiscal policy is restricted by law in the EU and by politics in the US. More generally, countries that could use fiscal space, won’t; and many that would use it, shouldn’t,” he said.

Regarding structural reforms, he pointed out how market de-regularisation and liberalisation typically lead to lower wages and prices in the short-term.

“Structural reforms are essential for long-term potential growth, but it is difficult to see how they could spur growth significantly in the next two years, especially when the current problem is lack of global demand,” Constancio went on to explain.

Given the situation, it is not only wrong to talk down monetary policy, “it’s actually dangerous”.

The ECB vice President also emphasised that according to the ECB’s own research the central bank’s policies had contributed two-thirds of the economic expansion registered over the last two years.

Inflation in the euro area would have been a third of a per cent negative in 2015 had it not been for Frankfurt’s looser monetary policy, he added.

Similarly, despite negative rates banks in the euro area had seen their return on equity improve from 3.5% in 2014 to 5.7% last year.

Nonetheless, he admitted that negative interest rates on the ECB’s deposit facility had “a limit” but more for “fundamental” reasons and not just because of any effects they might have on lenders.

“The whole yield curve has been lowered, which is the sole objective of using this particular monetary policy instrument.

“To normalise inflation in the euro area we urgently need higher growth that can reduce negative output and unemployment gaps, using all really available policies. If not monetary policy, then what?”

Constancio was joined by the likes of Ilmars Rimsevics, the head of Latvia's central bank, who told the country's television channel on Friday that "money has become cheaper," he told Latvian television. "That is an unprecedented situation when the European Central Bank ... lends money to commercial banks at a zero interest rate."

Finland's central bank governor Erkki Liikanen was of a similar view, having reportedly told that country's MTV3 broadcaster that the ECB's ability to act has not run out and that rates would remain at their current level or lower for a longer period of time.