Cyprus Mail

Draghi says ECB ready to adjust policy if inflation drops further

The president of the European Central Bank (ECB) Mario Draghi

By Howard Schneider

The European Central Bank is prepared to respond with all its “available” tools should inflation in the euro zone drop further, ECB President Mario Draghi said on Friday in remarks that opened the door to possible policy action in September.

Speaking at a global central banking conference in Jackson Hole, Wyoming, Draghi said he is confident that stimulus steps announced in June, helped by a weaker euro, will boost demand in the ailing economic bloc.

But in stronger language than he has used in the past, Draghi stressed the central bank stands ready to do more. Recent growth data confirmed the currency bloc’s recovery remained “uniformly weak,” he said, promising to keep the policy stance accommodative for an extended period of time.

“The (ECB’s) governing council will acknowledge these developments and within its mandate will use all the available instruments needed to ensure price stability over the medium term,” he said at a luncheon attended by many of the world’s top central bankers including Federal Reserve Chair Janet Yellen.

“I am confident that the package of measures we announced in June will indeed provide the intended boost to demand, and we stand ready to adjust our policy stance further,” he said.

“The governing council would use also unconventional instruments to safeguard the firm anchoring of inflation expectations over the medium- to long-term,” he added.

The ECB’s governing council will meet next in early September.

Draghi did not, however, offer a qualifier as he did in introductory remarks at his August news conference when he added: “… should it become necessary to further address risks of too prolonged a period of low inflation.”

The ECB cut interest rates to record lows in June and launched a series of measures to pump money into the sluggish euro zone economy, where inflation has been in what Draghi has called “the danger zone” of below 1 percent for 10 months.

On Friday he said the drop in inflation was likely due to temporary factors such as energy prices and the Ukraine crisis.

Euro zone inflation was 0.4 percent in July, the weakest level since October 2009 and a far cry from the ECB’s target of below but close to 2 percent.

It is expected to weaken further in August.

Large-scale asset purchases, also known as quantitative easing (QE), represent the most powerful tool left in the ECB’s toolbox, although Draghi did not mention them in his speech.

He said he expected support for the economy from a weaker euro, a planned scheme to revive Europe’s market for securitised loans and the ECB’s new long-term loan plan, dubbed TLTROs, for which he said there was “significant interest from banks.”

The euro on Friday hit its weakest level against the dollar since September 2013.

Calls for the ECB to do more grew louder after data showed growth ground to a halt in the second quarter, dragged down by a shrinking economy in Germany and a stagnant France, even before any impact from sanctions imposed on and by Russia over Ukraine.

Draghi, in his speech, made clear neither monetary nor fiscal policy alone could solve Europe’s problems, urging governments to push ahead with structural reforms, such as making labour markets more flexible.

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