European Central Bank Executive Board member Yves Mersch said Tuesday that the risks to the Bank’s inflation outlook remains “broadly balanced” but added there is a real danger that prolonged low inflation could “de-anchor” expectations.
Speaking at the Brussels Economic Forum in the Belgian capital, Mersch also dismissed deflation risks and said banks around the currency area were gaining investor confidence.
“We don’t see deflation,” Mersch said. “We have a projection for inflation for the present year next and the one after, which is low and below what we could consider our opinion of price stability.”
He said the risks to this projections are still “broadly balanced,” to both the downside and the upside.
“Sentiment towards financial institutions has continued to strengthen in the euro area,” he said, citing some progress in balance sheet repair but also highlighted “lingering concerns about banks’ earnings outlook and asset quality.”
Mersch said it “would be a little bit daring” to say that the euro-area banking system had reached a turning point even though there had been “enormous efforts” to boost capital and deleverage, including banks raising E95 billion since 2012 and deleveraging by E4 trillion in the same period as part of a broad strategy to de-risk balance sheets and in some cases repay state aid.
“The asset quality in the banking sector is still giving rise to concern,” he said. “There has been progress, there has been some shedding of bad loans, but in some countries we still see a rise in non-performing loans.”
He noted that credit conditions were patchy across the region and sectors. Banks in the region remained vulnerable to a potential reassessment of risk in global markets, “compressed bond market premia” and exposure to emerging markets.
“Despite the easing of tensions in the sovereign markets, we are not protected against a relapse … and renewed stress at the heart of the euro area crisis remains a distinct but clear possibility.”
Asked about the risk of asset price inflation, he said: “I hope we are being able to heed the lessons from the past.”
He noted that asset prices are behaving differently across countries and that national regulators retain powers to intervene in local markets.