Draghi predicts ‘prolonged’ period of low inflation

Euro zone inflation will stay well below target for the next two years and the European Central Bank is ready to act if necessary to lift a listless economy, it saidtoday.

The ECB left its key interest rate at 0.25 per cent at its last policy meeting of the year, choosing not to follow through on November’s surprise cut. Markets expect further action in 2014, something ECB president Mario Draghi did nothing to deflect. “We may experience a prolonged period of low inflation to be followed by a gradual upward movement ... later on,” Mr Draghi told a news conference. “We are monitoring developments closely and are ready to consider all available instruments.”

He said today’s discussion had not focused on any one measure but there had been a “brief discussion” about cutting the deposit rate into negative territory, in an attempt to get banks lending more.

The decision to hold the main refinancing rate at a record low was widely expected after inflation edged up to 0.9 per cent in November, partially reversing a plunge to 0.7 per cent the month before. Unemployment has also fallen slightly. Fresh forecasts from ECB staff predicted inflation would average just 1.1 per cent next year and 1.3 per cent in 2015 - well below the ECB’s target of close to but below 2 per cent.

Growth is seen at a sluggish 1.1 per cent next year, although that is slightly higher than the 1.0 per cent estimated in September.

Mr Draghi said the risks to that outlook were skewed to the downside. Those threats included higher commodity prices, weaker domestic demand and export growth, and failure by euro zone government to implement structural economic reforms.

Reuters