ECB remains 'alert' to low inflation risk - Draghi

Monday 26 May 2014 10.56
Mario Draghi said the ECB needed to be watchful for a potential negative spiral of low inflation, falling expectation and poor credit
Mario Draghi said the ECB needed to be watchful for a potential negative spiral of low inflation, falling expectation and poor credit

The European Central Bank remains "alert" to the dangers of euro zone inflation undershooting the central bank's medium-term targets, president Mario Draghi has said amid widespread concern about deflation risks. 

His comments come against a background of speculation over whether the central bank will take new steps to ease monetary conditions at its next meeting early in June. 

"At present, our expectation is that low inflation will be prolonged but gradually return to close to 2.0 percent," Mr Draghi told a central banking forum organised by the ECB in Sintra, Portugal.

"Our responsibility is nonetheless to be alert to the risks to this scenario that might emerge and prepared for action if they do," Mr Draghi said.

"What we need to be particularly watchful for at the moment is, in my view, the potential for a negative spiral to take hold between low inflation, falling inflation expectations and credit, in particular in stressed countries," he said. 

Inflation in the 18 countries that share the euro is currently way below the ECB's 2% target, picking up only fractionally to 0.7% in April. 

According to the ECB's latest forecasts, area-wide inflation is projected to accelerate to 1.6% in 2016. 

But the ECB's chief economist Peter Praet recently pointed out that since the beginning of the year inflation tended to come out lower than expected. 

The persistently low level of inflation has raised the spectre of deflation in the single currency area, a phenomenon where households and businesses put off expenditure in anticipation of falling prices. 

At its policy meeting in Brussels earlier this month, Mr Draghi had said the ECB's governing council was "comfortable" with the idea of easing monetary conditions next month.

While council voted to hold its key interest rate steady at its current all-time low of 0.25% for the seventh month in a row this month, Mr Draghi gave the strongest hint yet that further easing is on the cards.

But a decision would depend on the central bank's latest inflation forecasts before taking concrete action.

One of the campaign arguments of anti-European Union or nationalist parties in the European parliament election yesterday was that the ECB is too distant, too bureaucratic and too tight with its monetary policies.