Brussels, 26/05/2014 (Agence Europe) - Downside risks to inflation, which it expects to remain on the low side for a long period of time, are the major concern at the European Central Bank.
“At present, our expectation is that low inflation will be prolonged but gradually return to 2%. Our responsibility is nonetheless to be alert to the risks that this scenario that might emerge and be prepared for action if they do. What we need to be particularly watchful for at the moment is the potential for a negative spiral to take hold between low inflation, falling inflation expectations and credit (Ed: lending) in particular in stressed countries”, said ECB head Mario Draghi at a forum organised by the ECB in Sintra, Portugal, on Monday 26 May.
Draghi, who used to be the governor of the Bank of Italy, said it was important to choose the right moment for any monetary decisions: “In terms of monetary policy response, the key issue is timing”, he said, adding: “There is no debate about our goal, which is return inflation towards 2% in the medium term, in line with our mandate”.
The ECB is looking at a number of potential moves, some of which are to be announced at the upcoming meeting of the Governing Council on Thursday 5 June (see EUROPE 11075). It may introduce negative interest rates for very short-term deposits that banks make at the ECB, rather than the zero interest rate that currently applies. Another option is cheap money for banks that could then be lent on to the real economy. Controversial European quantitative easing could be introduced by buying up wads of private and/or public bonds on the markets as a longer-term method to raise prices but this would only be used in the event of a slump in the economic situation in the eurozone. (MB)