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Europe's demographic shift is already lowering interest rates,
leaving the ECB with decreased conventional firepower and
raising the risk that it would more often miss its inflation
objective, Praet said in Madrid.
The ECB has undershot its target for the past five years and
inflation is not set to hit the bank's objective of almost 2
percent before the end of the decade, suggesting that monetary
policy may have lost some of its potency even as the bank used
unprecedented firepower to stimulate the economy.
"We should be wary about permanently placing a large burden on
central banks to deploy tools to counter problems that are
ultimately caused by structural economic and financial
inefficiencies," Praet said.
While unconventional tools have been effective for now, Praet
argued, the neutral interest rate, often called the equilibrium
rates, has fallen sharply as the population's aging has
increased savings, lowered productivity growth and lifted the
number of pensioners in relation to active workers.
"Recessions may last longer, and recoveries may be slower and
shallower, with a higher risk throughout of missing the
objective," Praet said, referring to the impact of low
equilibrium interest rates on ECB policy.
Praet added that possible solutions could include raising the
retirement age and policies that encourage labor force
participation, for example through increased labor mobility or
more effective skills training.
He also called for policies to revive productivity growth,
particularly in spreading productivity enhancing measures across
borders and to all corners of the currency bloc.
(Reporting by Paul Day and Jesus Aguado; Writing by Balazs
Koranyi; Editing by Matthew Mpoke Bigg)
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