ECB's credibility at risk if inflation target is missed: Praet

[November 19, 2015]  By Francesco Canepa and Balazs Koranyi

FRANKFURT (Reuters) - The European Central Bank will face a credibility problem if it fails once again to bring inflation back to its target and could risk losing the ability to influence household and market behavior, Executive Board member Peter Praet said on Thursday.

With inflation expectations still holding below the ECB's target of almost 2 percent, the bank has already signaled it could take longer for it to reach the target. Praet's comments highlight why the ECB has raised the prospect of more policy easing in December.

The ECB must signal its ability to act because price pressures are still weak and long-term inflation projections risk becoming unanchored, Praet, the bank's chief economist, told a conference.

The ECB will decide on Dec 3 whether to cut rates or expand its 60-billion-euro per month asset purchase program.

"I count the number of times we had to say we push back the horizon where inflation is going to go closer to (target)," Praet said.

"At some point you have a problem of credibility and... it means that you have a risk always that markets and households at some point will revise down their long term expectations.

If price growth keeps missing the ECB target at a time when slack in the economy is high - meaning output is well below capacity - households' and investors' inflation expectations will keep going "lower and lower", Praet said.

Praet's words echo recent comments from ECB Vice President Vitor Constancio, who highlighted concerns over long term inflation expectations, a key argument in the past for the bank to act.

Markets are pricing in a 10 basis point cut in the ECB's deposit rate and analysts in a Reuters poll also predicted an expansion of the asset purchases, known as quantitative easing.

Praet also said the ECB cannot remain idle when other players are passive, alluding to the ECB's repeated calls on governments to reform their economies to build lasting growth and use available fiscal tools.

Although the euro zone's recovery was intact, an argument against action for some rate setters, Praet said the rebound is weak and fraught with risks while investment is still depressed.

Dismissing suggestions about constraints, Praet said all of the banks policy instruments are available, including a rate cut, and it was willing to act.

(Reporting by Francesco Canepa; Writing by Balazs Koranyi; Editing by Toby Chopra)

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