Cool the drama on low inflation, ECB's Nowotny says
By Jonathan Spicer
NEW YORK (Reuters) - It is important not to "over-dramatize" low euro-zone inflation because it should begin to rebound this summer, a European Central Bank policymaker said on Wednesday amid a political storm over the effects of the ECB's ultra-low interest rates.
Ewald Nowotny, a member of the ECB Governing Council, in an address to a New York audience, said near-zero inflation is mainly due to depressed energy prices. Until there is "clear improvement" in prices, he said, the central bank would need to keep monetary stimulus in place.
German Chancellor Angela Merkel and French Finance Minister Michel Sapin on Wednesday became the latest to join the fray, pushing back on German politicians' concerns that low rates are squeezing retired Germans, could lead to asset bubbles and could even boost right-wing political parties.
In noting the effect of energy prices on inflation, Nowotny, speaking ahead of the ECB's April 21 policy meeting, stressed that core measures that ignore energy and food prices are higher and "quite relevant" to the debate.
"I want to underline this because, frankly speaking, I think one should not over-dramatize the low inflation rates that we just experience now," Nowotny said, adding later that he was responding to statements by German politicians.
"I think there will be movements towards a normalization of inflation rates starting this summer," he said. "We do not expect that oil prices will go down with (as) dramatic a decrease as last year, so just automatically as an echo effect we will have higher inflation."
The ECB targets inflation of close to 2 percent over the medium-term, while inflation is running at just below zero. To pick up price pressures, the central bank has cut interest rates to record lows and expanded its asset purchases.
A storm of protest erupted in thrifty Germany after ECB President Mario Draghi last month described so-called helicopter money - sending money directly to citizens - as a "very interesting," if unexamined, concept.
On Tuesday, German Finance Minister Wolfgang Schaeuble told Reuters that the ECB's record low rates are causing "extraordinary problems" for German banks and pensioners and risk undermining voters' support for European integration.
Merkel sought to cool the feud with a call for lawmakers, not just central bankers, to boost growth, while Sapin warned Germany to respect the ECB's policy independence.
Nowotny, set to travel to Washington this week for meetings of the International Monetary Fund, gave a relatively positive assessment of Europe's prospects, including downplaying the risk of right-wing fringe politics and outlining mixed economic effects from the refugee crisis.
"If the economic situation in Europe is improving then of course also the ECB will be able to reduce these efforts, as we have seen in the U.S." where rates are rising, he said. "If there is no clear improvement ... especially in the inflation data, I see no room for changes at the ECB."
Turning to the risk of Brexit, Nowotny again warned that if Britain exited the European Union "there would be no way of having some kind of privileged situation for the City of London."
(Reporting by Jonathan Spicer; Editing by Chizu Nomiyama and Leslie Adler)
