ECB's Draghi: Low inflation could delay spending

SINTRA, Portugal–European Central Bank President Mario Draghi said Monday he sees a risk that expectations for ultralow inflation will gain a grip in the euro zone and spur consumers and businesses to delay purchases, the latest sign that the ECB is prepared to take fresh easing measures when it meets next week.

Mr. Draghi’s comments, delivered at an ECB conference in Sintra, Portugal, signaled that the ECB is weighing a wide variety of steps from interest-rate cuts to new bank loans or broad-based asset purchases to keep excessively weak inflation from undermining the euro zone’s nascent economic recovery.

“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, in particular in stressed countries,” Mr. Draghi said in his prepared remarks.

“There is a risk that disinflationary expectations take hold” and cause households and firms to delay purchases and investments “in a classic deflationary cycle,” Mr. Draghi said. “We are not resigned to allowing inflation to remain too low for too long,” he said.

Mr. Draghi said after the ECB’s May 8 meeting that officials were “comfortable” with taking easing steps at their June 5 meeting, though officials first wanted to see updated staff inflation and growth forecasts due then through 2016.

Since that comment, other ECB officials have touted a similar line, making interest-rate cuts practically a done deal in the view of financial markets. Indeed the euro has weakened in recent weeks on expectations for fresh ECB stimulus.

Annual inflation was 0.7% in April, far below the ECB’s target of just under 2% over the medium term. It has been under 1% for many months.

In addition to using conventional interest rate tools, options for the ECB include new long-term loans to banks and purchases of asset-backed securities, Mr. Draghi said Monday, as well as broad-based asset purchases if inflation expectations weaken too much.

My 26, 2014 (Source: Marketwatch)

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