European Central Bank chief economist Peter Praet says low interest rates reflect "economic malaise"

Jessica Morris
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Praet said low interest rates "are not so much a choice" (Source: Getty)

The European Central Bank's (ECB) chief economist Peter Praet has that low interest rates are due to "economic malaise" in the euro area and across world.

He said the central bank's hand was forced by uncomfortably low inflation across the single currency bloc, as well as persistent weakness in the economy.

"Low interest rates are ultimately a consequence of weak secular trends, coupled with the cyclical consequences of a complex debt crisis, exacerbated by a monetary union with institutional and structural flaw," he said.

"Normalisation" wouldn't come through raising interest rates or scaling back the Bank's stimulus measures, a scenario which would worsen the economic situation, but addressing the underlying factors that are keeping real interest rates and inflation expectations low according to Praet.

But he stressed that the central bank's efforts must be supported by other policies to reduce negative sentiments about the euro area's growth prospects, and encourage higher investment.

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Earlier this year the ECB unleashed an unprecedented bond-buying programme to reignite its ailing economy. First unveiled in March, it will pump €60bn (£46.7bn) into the euro area every month until September 2016.

The programme came after other measures, such as cutting the main interest rate to 0.05 per cent, and its deposit rate to -0.2 per cent.

Praet added that the ECB could increase its bond-buying programme to ensure inflation returns to its two per cent target in the medium term, in line with comments made by ECB President Mario Draghi last week.

Annual inflation was 0.2 per cent in the Eurozone last month.

"The Governing Council will closely monitor the risks to the inflation outlook over the medium-term," he said.

"It has emphasised its willingness and ability to act ... In particular, the asset purchase programme contains sufficient flexibility to adjust its size, composition and duration."

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