FRANKFURT (Reuters) - The risk has increased that euro zone inflation expectations drop further and some wage data may already indicate that long term expectations are 'de-anchoring,' European Central Bank chief economist Peter Praet told a Portuguese newspaper.
The ECB has been easing policy aggressively over the past several years, providing stimulus through rate cuts, asset buys and cheap loans to avoid deflation as low energy prices, high unemployment and weak growth push down prices.
The ECB is especially worried about de-anchoring expectations as it would indicate waning confidence in the bank's ability to raise inflation back to its target of close to 2 percent, raising the risk of deflation.
"What we say is that the risks of de-anchoring have increased, obviously," Praet told Público newspaper in an interview published on Monday. "We have seen in some countries some signs of de-anchoring in wage formation. But, this being said, we haven’t concluded that inflation expectations are de-anchored."
"I think that what the ECB has demonstrated with its action is that we are absolutely determined to avoid deflation," Praet, who also sits on the ECB's Executive Board, said.
Praet said the ECB still has tools to act but noted that some of the measures decided in March have yet to be implemented, so further policy accommodation is still coming.
"When people ask: 'Are you ready for a new shock?', I always answer: trust us, we always find the means within the scope of our mandate," Praet said. "We have shown in the past that we can be very creative within our mandate."
Praet said rates could go even lower, although the ECB recognizes that negative rates have unintended side effects that start to become more significant, particularly on the profitability of banks.