European Central Bank Governing Council member Christian Noyer warned on Tuesday that the Eurozone could face a “perverse feedback loop” in which low inflation, increasing real rates and a rising euro threaten the economic recovery.
Noyer, speaking at a conference in Paris, said that while low long-term interest rates have helped ease financing conditions, a rising euro has had the opposite effect.
“It’s not clear whether the overall effect is positive,” he said. “While nominal conditions are more accommodating in the euro area than in the US, real indicators point to a more restrictive stance.”
Noyer added that “we may see a perverse feedback loop develop, with low inflation, increasing real rates, capital inflows and exchange rate appreciation mutually fuelling each other. He said that the “financial economy may be heading towards a bad equilibrium that would threaten the real economic recovery.”
Noyer said that package of measures adopted by the ECB last month was a “strong response” to meet this threat. He said the Eurosystem was “actively preparing” to buy asset-based securities and was “ready to take any actions that may provide necessary should downside risks further materialise.”
While the debt crisis was no longer an existential threat to the Eurozone, Noyer said that it had left the monetary policy transmission mechanism “severely impaired.”
He said the percentage of viable small-business borrowers that were financially constrained was 25% in stressed Eurozone countries compared to only 1% in core countries.
On recent changes in the ECB’s communications strategy, Noyer said that accounts of Governing Council meetings were necessary for markets to better understand the basis for council decisions.
He said it was too early to say exactly what the accounts would look like but they must be published in a form that does not inhibit Governing Council discussions.
“We need to preserve the collegiality of the Governing Council’s deliberations, and the ability of each and every member to feely express and exchange views, or order to let them be influenced by the course of discussions.” he said.