February 27, 2014 / 7:35 PM / 6 years ago

ECB's Draghi says euro zone clearly not in deflation

FRANKFURT (Reuters) - The euro zone is not experiencing deflation, but the European Central Bank is alert to potential downside risks to price stability and will act if needed, ECB President Mario Draghi said on Thursday.

European Central Bank (ECB) President Mario Draghi waves as he arrives at an eurozone finance ministers meeting in Brussels February 17, 2014. REUTERS/Francois Lenoir

Giving no hint of any urgency to take action at the ECB’s policy meeting next Thursday, Draghi said households in the euro area are not deferring purchases, which would be a sign of deflation taking hold.

“With the average euro area inflation rate standing at 0.8 percent, we are clearly not in deflation,” Draghi said in the text of a speech entitled ‘The Path to Recovery and the ECB’s Role’.

“Moreover, inflation expectations for the euro area over the medium to long term continue to be firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2 percent,” he added.

A third of economists polled by Reuters have pencilled in a cut in the ECB’s main refinancing rate from the current 0.25 percent next week. Most expect a reduction of 5 to 15 basis points, mirroring the Bank of Japan’s interest rate moves.

Draghi, who has previously warned of the risk of inflation getting stuck in a “danger zone” below 1 percent, said cheaper energy contributed to the low inflation rate and added that the ECB saw no evidence consumers were postponing expenditure plans.

“But any setbacks in the absorption of economic slack may give rise to further negative developments,” he added, according to the text of a speech to be given at a Bundesbank dinner in Frankfurt.

“Against this background, we will remain alert as to whether any indications on further downside risks to price stability emerge and we stand ready to act,” he said.

The ECB saw the euro zone’s economic recovery taking hold gradually, he said, “albeit at a slow and uneven pace.”

After the ECB’s February 6 meeting, Draghi said the bank had decided not to act while it acquired more information on the growth and inflation outlook and assessed the impact on the euro zone of turmoil in emerging markets.

The ECB has set out two situations that could trigger fresh policy action: a deterioration in the medium-term inflation outlook and an “unwarranted” tightening of short-term money markets.

The central bank has already said it would keep its key interest rates at their present or lower levels. Draghi reiterated this so-called forward guidance, saying “we expect the key ECB interest rates to remain at current or lower levels for an extended period of time.”

He also defended the ECB’s flagship crisis-fighting tool, the Outright Monetary Transactions (OMT) programme, after Germany’s Constitutional Court asserted earlier this month that it exceeded the bank’s mandate.

The German court earlier in February referred a complaint against the OMT to the European Court of Justice, saying there was good reason to think the OMT plan violated a ban on the ECB funding governments.

The decision has prompted investors to ask questions about the validity of the OMT.

“Like all our monetary policy measures, it has served to ensure compliance with our price stability mandate as provided for in the Treaty,” Draghi said of the OMT.

Writing by Paul Carrel; Editing by Larry King

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