By David Barwick – FRANKFURT (EconoStream) – The European Central Bank will do what it takes to avert the threat of disinflation or deflation, ECB Executive Board member Fabio Panetta said Thursday.

In an interview with Austrian daily der Standard, Panetta, according to a text published by the ECB, called the current environment clearly disinflationary and predicted that inflation over the medium term would remain well below the ECB’s definition of price stability.

With companies prevented from doing business; uncertainty and joblessness high; and oil prices and global demand weak, “[i]t’s clearly a disinflationary environment”, he said.

The ECB will do all that its mandate permits to “avoid disinflationary or even deflationary risks”, he said. “And we remain determined not to tolerate any tightening of financing conditions for as long as the economic damage caused by Covid-19 persists. We have all the necessary tools, we are using them decisively.”

Pressed on the possibility of a return of increasing prices next year, Panetta said he did not expect this, but rather that inflation would remain “very low for the next two or three years, well below our definition of price stability”. He noted that market-based indicators suggest weak long-term consumer prices.

Modifying the ECB’s definition of price stability to suit low inflation “wouldn’t be a good idea”, he said, invoking the usual arguments, including the difficulty of emerging from deflation.

Removal of monetary policy stimulus would have to be contingent on a sustainable recovery of inflation in line with the ECB’s objective, he said, while self-sustaining growth should be the precondition for withdrawing fiscal support. The willingness even of fiscally conservative countries to deploy large amounts of money in reaction to the current crisis made him optimistic that the euro area understood that fiscal policy following the financial crisis had been too quick to return to a pro-cyclical stance, he said.

Although governments will be much more indebted after the crisis, low interest rates would contribute to sustainable finances, he said.

The fact that yields on Italy’s sovereign bonds fell after the government there announced a €50 billion stimulus programme was justified, Panetta implied, observing that this reflected the reduction of economic risk associated with the spending and the simultaneous support from loose monetary policy.

“It would be much worse if fiscal policy was not used in the current situation, even in countries where public debt is relatively high,” he said.