Austria’s central banker Ewald Nowotny said that the European Central Bank is likely to communicate its intentions to raise again interest rates when the inflation rate in the euro area picks up – something that is not expected to happen before 2018- as such a step could affect the banks’ loan portfolio quality.
Nowotny, who because Austria is one of the single European currency bloc’s member holds a seat on the ECB’s governing council, said that “central banks have to be aware that when rising interest rates, you have to be very careful”. The Austrian central bank governor was addressing an audience in Nicosia on Thursday.
The US Federal reserve is an example which first proceeded with reducing its asset purchase programme before resorting to rate hikes, he continued.
The ECB will have to take a very cautious approach “and will have to make effort in informing markets,” Nowotny said adding that currently the euro area, which reduced last year its marginal rate to 0.40 per cent into negative territory in an attempt to prevent inflation rate falling below zero, and the US economy “are in a different part of economic cycle”.
Banks in Cyprus, which emerged last year from a prolonged recession, are trying to reduce their non-performing loans which account roughly for half of their loan portfolio. Their efforts to reduce them have been facilitated by record low rates in the euro area and in Cyprus.
The euro area’s economy which is projected to expand 1.7 per cent this year before growing 1.6 per cent in 2017 and 2018 and inflation rate is expected to pick up from 0.2 per cent this year to 1.2 per cent in 2016 and 1.6 per cent in 2018.
The ECB, Novotny added, is scheduled to re-evaluate its asset purchase programme in December, which it launched last year also in an attempt to boost the euro area’s anaemic growth.
Nowotny said that the euro area should try with structural reforms and fiscal policy measures to avoid getting into a situation of prolonged low inflation and low growth, like Japan.
The Far East country distinguishes itself from the euro area with its shrinking labour force which is not the case in Europe, where the labour force still grows.