ECB Prepared to Cut to Zero if Economy Deteriorates Further, Says Bini Smaghi

The European Central Bank is prepared to bring its key policy rate lower possibly to zero if the economic situation deteriorates further, ECB Executive Board member Lorenzo Bini Smaghi said on Tuesday.
“If the (economic) situation worsens, the ECB is ready to reduce rates further, even to zero,” the central banker said in an interview with German newspaper Börsen-Zeitung.

“That is above all the case if the economy was really threatened by sustained deflation,” Bini Smaghi added. “And in such a situation, the bast approach would be to act sooner rather than later.” However, Bini Smaghi was quick to add that he did not foresee the risk of prolonged deflation in the euro zone.

“The data that we have, including market expectations derived from the yield curve, do not suggest sustained deflation in the euro zone,” he said.

Bini Smaghi also said that cutting rates to low levels and then increasing them would not help the economy.

Bini Smaghi added that buying government bonds in the secondary market would not be in line with the spirit of the ECB and doubted that a central bank could effectively lower longer term rates by purchasing government paper.