The European Central Bank is prepared to take action to counter economic risks not only if these actually materialize but even if the threat level merely rises, ECB President Mario Draghi told reporters Sunday following the G-20 meeting here.
Still, Draghi, given the chance to prepare markets for action at the ECB’s next Governing Council meeting on March 6, professed instead a need to gather more information.
Even if “medium-term inflation expectations remain firmly anchored at 2%,” he said, persistently low inflation increases the odds of “potentially negative developments,” and “the Governing Council is willing and ready to take action in case these risks materialize – not even materialize, but strengthen.”
But Draghi offered little to those hoping he would flag a rate cut at the Council’s next monthly meeting: “By then we will have the full set of information needed to decide whether to act or not. … When we have the full information set, we will decide what to do.”
He noted again that the ECB’s publication of economic and price forecasts for 2016, further into the future than the medium-term staff projections up to now, would “be one important change.”
He once again denied fears of deflation in the euro area. “We don’t have any evidence of people postponing their expenditure plans with a view toward buying the same thing at lower prices.”
Repeating the ECB’s mantra that inflation would be “subdued … for a prolonged period of time,” Draghi sought again to argue that current Eurozone HICP was not out of the ordinary in a historical post-crisis context or in geographical comparison.
“It’s not much lower than the rate of inflation that there is in the United States, where the recovery, however, is way more advanced than it is (in the Eurozone),” he said. “What this says basically is that there is a global component to this low rate of inflation coming from global energy and food.”
Moreover, core inflation rates were strongly influenced by core inflation in the four countries under EU adjustment programs, he said. “And that to us means there is a rebalancing … and so part of this is simply relative price adjustment, and from this viewpoint it’s not unwelcome,” he affirmed.
Of course, he conceded, demand is weak and unemployment “very high,” albeit apparently now stable. Feeble inflation thus goes back to factors that are “partly global, partly supply,” but also demand-related, he said.
Draghi was non-committal as well on the subject of a possible cessation of ECB sterilization of bond-operation liquidity, noting merely that authorities had “various instruments” at their disposal.
He repeated contingencies that would prompt the ECB to move, namely “an unwanted tightening of monetary conditions coming from the behavior of the short-term money market rates that translate themselves … onto the long-term yield curve, coming from factors that have nothing to do with our economic situation.”
In this respect, he said, the ECB considers its forward guidance to have been “pretty successful at stabilizing the curve … and certainly reducing the volatility of that curve.”
The other contingency, he continued, would be “a worsening in the outlook … of the price stability that would require a different set of instruments.”
Noting that the Eurozone in fourth quarter posted its third consecutive quarter of positive growth, Draghi said: “There is a recovery underway. The recovery, as I’ve said many times, is still, I’d say, modest, fragile, uneven; it starts from very low levels of activity. But less and less so. So all the words I’ve used still apply, but less and less so. In other words, we see progress, but we still see downside risks.”
Whereas the recovery had previously relied mainly on exports, Draghi elaborated, “now it’s gradually, slowly spreading to the domestic component of domestic demand, which is an encouraging sign.”
It was necessary “to be cautious about this,” he said, given these developments were still not robust, although this could change over time.
Draghi paid particular tribute to improved confidence, asserting that “most if not all survey data seem to point in the right direction.”
Low inflation, meanwhile, is supporting purchasing power, he said, acknowledging however that this was “the other side of weak demand and high unemployment.”
An additional factor helping growth this year, according to Draghi, would be the smaller drag versus 2013 stemming from fiscal consolidation.
Finally, he noted, structural reforms are paying off in some countries, where their benefit is seen on labor markets and current accounts.
Most of the euro area still struggles under high debt, he said. Fiscal consolidation should be implemented in more growth-friendly fashion, he said, “but we don’t want to unravel the progress that we’ve achieved” on the fiscal front.
Draghi declined to answer a question on the euro’s exchange rate, referring to the G20 communique that dealt with the subject and noting as in the past that “the exchange rate is important both for price stability and growth and for jobs.”
Spillovers from policy shifts in some major economies “have hit selectively the most vulnerable (economies) amongst the group,” he said, “the most vulnerable in the sense that they needed to undertake economic policies geared to stability … economies that were vulnerable to begin with.”
Everyone knows what Italy needs, he said, so that the issue there “is not so much what to do but to do it.”
In Spain, where there are “several encouraging signs,” he said, “recovery is proceeding.”
Ukrainian political turmoil has not hurt Europe’s economy, he said.
“The Ukraine – I say tragedy – has certainly an impact in human, social and political terms which is way bigger than any economic impact,” he said. “As the president of a central bank I have to limit my attention to the economic impact and … we don’t see the danger of these spillovers, economically speaking.”