Bini Smaghi Says ECB Should Use QE If Deflation Risk Arises

European Central Bank Executive Board member Lorenzo Bini Smaghisaid that policy makers shouldn’t shirk from using quantitative easing if deflation becomes a danger to the euro region. “I do not understand the quasi-religious discussions about quantitative easing,” Bini Smaghi, who will leave his post at the end of the month, said in an interview published yesterday by the Financial Times. The ECB confirmed the comments. “It is appropriate if economic conditions justify it, in particular in countries facing a liquidity trap that may lead to deflation.”

Unlike the U.S. Federal Reserve and the Bank of England, the ECB has offset liquidity created by purchases of government bonds so that such operations don’t amount to quantitative easing that stokes inflation. ECB Executive Board member Juergen Stark told Germany’s Die Welt newspaper in an interview published today that the central bank doesn’t “have a mandate” for unlimited purchases of government bonds. Growth prospects in Europe “have deteriorated” since September, U.K. central bank Governor Mervyn King said yesterday after a risk assessment by European officials. Stark, who resigned in September to protest bond purchases, said while the euro-region economy could shrink at the end of 2011, deflation threats are “significantly lower” than after the collapse of Lehman Brothers Holdings Inc. in 2008.

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