The euro zone economy may be in better shape than earlier thought, ECB board member Benoit Coeure said on Thursday, suggesting the European Central Bank might bolster the economy even if it tightens policy.
Making a largely academic argument, Coeure said that the ECB’s neutral policy rate may be higher than is now estimated. That suggests the bank could still support inflation with tighter policy, because the stimulus provided now may be more generous than initially thought.
“This could help explain why our current measures have been so effective in stoking the recovery: they may have been more expansionary than many believed,” Coeure said in Paris.
“If confirmed in the future, a higher than believed neutral rate would allow us to recalibrate our monetary policy as the expansion continues, while still providing the accommodative stance that is necessary for inflation to converge sustainably towards our aim,” he said.
ECB policymakers are now debating whether to curtail stimulus further, and comments from Coeure, who oversees the ECB’s market operations, may be seen as making the case for a tighter policy stance.
ECB President Mario Draghi recently argued that slack in the euro zone economy may be bigger than thought, suggesting that it would take even longer for inflation to rise back to the ECB’s target of almost 2 percent.
Extending that argument, Coeure said that bigger slack could mean bigger potential growth, which suggests that the ECB has a longer way to go before its policy stance neither stimulate nor slows growth.
“If potential growth has not fallen by as much as we thought, it may imply that the neutral rate of interest – the level that determines the degree of accommodation our policies provide – might be higher than is commonly estimated,” Coeure said in Paris.
Still, Coeure added that current ECB policy stance was appropriate, adding that rates would remain at their present levels for an extended period of time, in line with the bank’s guidance.