04 April 2012

Bloomberg: Draghi says inflation risks prevail as economy stabilises

European Central Bank President, Mario Draghi, said policy-makers are prepared to act against inflation threats if needed, while assuring investors that the ECB doesn't plan to withdraw emergency stimulus any time soon.

“All the necessary tools are available to address upside risks to price stability in a firm and timely manner”, Draghi said in Frankfurt after the ECB held its benchmark rate at a record low of 1 per cent today. At the same time, it’s premature to talk about the ECB’s exit strategy, Draghi said, adding that the economic outlook is subject to downside risks and inflation will remain contained in the medium term.

The ECB is balancing the threat of inflation in Germany, Europe’s largest economy, against the need to fight the sovereign debt crisis. While nations from Greece to Spain are battling recessions and record unemployment, workers in Germany are winning some of the biggest pay increases in 20 years.

“Today’s press conference was a strange brew between reassuring the markets that talk of an exit strategy is premature and trying to alleviate the German fear of an uptick in inflation”, said Peter Vanden Houte, an economist at ING Group in Brussels. “The ECB’s policy has been criticised in Germany as potentially stoking inflation. Draghi clearly wanted to set things straight.”

The ECB predicts higher energy costs will keep euro area inflation above its 2 per cent limit this year before it slows in 2013. The rate was 2.6 per cent in March. “We will pay particular attention to any signs of pass-through from energy prices to wages”, Draghi said. “However, looking ahead, in an environment of modest growth in the euro area and well-anchored long-term inflation expectations, underlying price pressures should remain limited.”

Draghi’s inflation warning comes just months after the ECB cut borrowing costs and pumped more than €1 trillion of cheap cash into Europe’s banking system to stem the debt crisis. Asked about today’s pledge to act on price risks in a “firm and timely manner” -- a new comment in the policy statement -- Draghi said: “I don’t think I’m stepping up my rhetoric on inflation”.

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