European Central Bank president Mario Draghi said any worsening of the medium-term outlook for inflation in the euro area could be the trigger for broad-based asset purchases.
“The objective here would not be to defend the current stance, but rather to increase meaningfully the degree of monetary accommodation,” Mr Draghi said during a speech in Amsterdam today.
“In order to fulfil its mandate, the Governing Council is committed - unanimously - to using both unconventional and conventional instruments to deal effectively with the risks of a too-prolonged period of low inflation.”
With euro-area inflation slowing to the weakest rate in more than four years in March at 0.5 per cent, Mr Draghi has signaled willingness to use asset purchases that could be similar to quantitative easing programs at other central banks.
Even so, the ECB president may not need to act immediately if this month’s inflation data on April 30th show a rebound in price gains as the region’s recovery takes hold. “While inflation will remain low for a prolonged period, we see it gradually rising back to 2 percent,” Mr Draghi said.
“The delay is largely explained by the impairments in the transmission mechanism that lengthen the lag between our accommodative policy stance and price developments.”
Deflation (or falling prices) rather than inflation continues to be identified by analysts as one of the bigger threats to Ireland’s recovery.
A prolonged period of falling prices would have serious repercussions for indebted businesses and households here as it increases the relative costs of servicing debt.
Mr Draghi said that the ECB doesn’t see broad-based deflation risks in the euro area, while adding that a stronger euro exchange rate does threaten the outlook for prices.
“A rise in the exchange rate, all else being equal, implies a tightening of monetary conditions, a downward impact on inflation and potentially a threat to the ongoing recovery,” he said.
“If so, this would call for policy action to maintain the current accommodative stance.”
Bloomberg
