EBC to act if 'lowflation' lingers

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IOL bus apr3 ECB AFP File photo: Daniel Roland

Frankfurt - The European Central Bank is ready to deploy anything in its monetary policy toolbox if inflation stays too low for too long despite keeping interest rates steady on Thursday, its president said.

The ECB held its main interest rate at a record low of 0.25 percent and the rate for bank deposits at central banks at zero,

hoping the euro zone recovery will gain strength unaided.

ECB chief Mario Draghi told a news conference that he and his colleagues expected a prolonged period of low inflation and that if it dragged on too long, action would be taken.

That marked a significant shift of tone from last month when he appeared to set quite a high bar to action.

“We will monitor developments very closely and we will consider all instruments available to us,” Draghi said. “We are resolute in our determination to maintain a high degree of monetary accommodation and act swiftly if required.”

He emphasised that any policy shift could be over and above interest rate moves, saying: “The Governing Council is unanimous in its commitment to using also unconventional instruments within its mandate in order to cope effectively with risks of a too prolonged period of low inflation.”

He added that printing money - quantitative easing - had been discussed at Thursday's policy meeting.

Having barely reacted to the earlier policy decision, Draghi's comments saw the euro drop to a session low against the dollar.

Euro zone inflation fell to 0.5 percent in March, levels last seen when the economy was deep in recession in 2009, but it was driven by the kind of softer food and energy prices the bank usually judges as temporary.

Draghi said the risk of deflation remained limited and labelled the latest inflation figures hard to read, partly because Easter holidays fall in April this year after coming in March last year, thereby delaying the impact of rising travel and hotel prices at a time when many people take a holiday.

“We need more information to assess whether there has been a change in the medium-term (inflation) outlook,” he said.

THINKING THE UNTHINKABLE

Policymakers have been willing in recent weeks to publicly broach cutting deposit rates below zero - effectively charging banks to hold cash with the ECB - or embarking on bond purchases as the United States, Japan and Britain have, if the threat of deflation became more acute.

Most notably, Bundesbank chief Jens Weidmann - often a hardliner - has said creating money via quantitative easing was not out of the question.

One reason for that appears to have been the strength of the euro which will bear down on import prices, depressing inflation further.

Indeed, one aim of flagging possible future action could be to try and talk the currency down.

Draghi said the exchange rate was not a policy target but was a factor in assessing price stability. “The possible repercussions of both geopolitical risks and exchange rate developments will be monitored closely,” he said.

Pressure from abroad to act has mounted, most notably from the International Monetary Fund, which has warned of the threat of “lowflation” rather than outright deflation.

“More monetary easing, including through unconventional measures, is needed in the euro area,” IMF head Christine Lagarde said in a speech on Wednesday, outlining the Fund's policy recommendations ahead of its spring meetings next week.

Draghi conceded that low inflation made euro zone debt harder to cut and economic adjustment more difficult.

Last month, the ECB forecast it would take 2-1/2 years for inflation to rise to 1.7 percent, which even then would barely meet the target for annual price growth below but close to 2 percent.

Euro zone purchasing managers surveys this week showed the bloc's businesses started 2014 with their best quarter in three years, but it came at a cost as they slashed prices to drum up trade, which could further stoke deflation fears.

Buying government assets with newly created money - as favoured on a massive scale by the U.S Federal Reserve, Bank of Japan and Bank of England - is a tough prospect for the ECB.

Reuters


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