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Low growth and inflation new normal

Wednesday, July 16 12:32:38

Low economic growth and low inflation are the "new normal" according to ECB policymaker Ewald Nowotny today.

The European Central Bank must pursue an active policy stance to address low growth and inflation in the euro zone even though it recognises there is a risk of asset price bubbles forming as a side-effect, he said.

"The new normal is a situation where we have low economic growth, low inflation, but also for the banks lower profitability, lower asset quality and less short-term funding," he said in a lecture at Frankfurt University.

"I think this is a situation that will stay with us for quite some time," added Nowotny, whose role as Austrian central bank chief gives him a seat on the ECB's policymaking Governing Council.

The ECB cut interest rates to record lows last month as part of a package of measures to breathe life into a sluggish euro zone economy, where inflation is running far below the central bank's target and there is a dearth of credit to smaller firms.

"We see that in this situation of low growth, of being way below our definition of price stability, we have to have an active monetary policy," Nowotny said.

"But we also see the dangers that there might be side-effects in the way of bubbles in certain fields," he added. "To avoid these side-effects is exactly the role of macro-prudential measures."

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