Weak inflation convinces ECB to sustain stimulus

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Jeff Black and Stefan Riecher Frankfurt

The European Central Bank (ECB) would take action if the outlook for inflation worsened or money market turbulence resumed, bank president Mario Draghi reiterated yesterday.

“We remain firmly determined to maintain the high degree of monetary accommodation and to take further decisive action if required,” Draghi said at a press conference in Frankfurt, after the ECB left interest rates unchanged.

“We firmly reiterate our forward guidance. We continue to expect the key ECB interest rates to remain at present or lower levels.”

Draghi’s opening statement made no mention of any further stimulus measures at the current time.

Draghi is trying to guide the euro zone through a fragile recovery and an extensive health check of the banking system, while ensuring he still has the policy tools to react to any worsening of the economic outlook. He is also trying to negotiate the market swings sparked by the Federal Reserve’s decision to start exiting its stimulus policy.

Inflation in the euro zone unexpectedly slowed to 0.7 percent last month, matching the slowest since 2009 and less than half the ECB’s goal of just under 2 percent. The last time the figure was that weak was in October last year, when it contributed to the ECB’s decision to cut interest rates.

“Recent evidence fully confirms our decision to maintain an accommodative stance of monetary policy as long as necessary,” Draghi said.

The 24-member governing council left the main refinancing rate at 0.25 percent, a decision predicted by 62 of 66 economists in a survey. The ECB also held the deposit rate at zero and the marginal lending rate at 0.75 percent.

On Draghi’s side are improvements in the economic outlook and financial markets. Gauges of euro zone manufacturing and German business confidence are at the highest levels in two-and-a-half years.

An ECB survey showed the region’s banks expect to stop tightening corporate credit standards this quarter, a move that could help rekindle lending. – Bloomberg


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