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No deflation in eurozone: ECB chief Draghi

Update: February, 28/2014 - 10:00

FRANKFURT – Inflation in the eurozone is currently very low but there is no danger of deflation – a widespread fall in prices – European Central Bank chief Mario Draghi has said.

"At this point in time, we do not have evidence of consumers postponing expenditure plans, which is something one would observe in a deflationary environment," Draghi on Thursday told a symposium organised by the German central bank or Bundesbank.

"To be sure, current inflation, which stood at 0.8 per cent in January, can clearly not be considered close to 2.0 per cent," or the ECB's definition of price stability.

However, "with the average euro area inflation standing at 0.8 per cent, we are clearly not in deflation, which is defined as a self-reinforcing fall in prices that is broad-based across items and across countries," Draghi said.

"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, 2.0 per cent," he said.

"What we are experiencing now is a prolonged period of low inflation, which will be followed by a gradual upward movement towards inflation rates below, but close to, 2.0 per cent later on," the ECB chief said.

Of course, inflation remaining low for a prolonged period of time "is a risk in itself," Draghi cautioned. It was important to carefully assess the causes of low inflation, he continued, pointing to energy price developments in particular.

"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," Draghi said.

The ECB's decision-making governing council is scheduled to hold its next policy meeting next week, with some central bank watchers predicting a possible cut in interest rates, already at all-time lows in the 18 countries that share the euro.

Draghi also defended the ECB's pledge to buy up potentially unlimited volumes of sovereign bonds of heavily-indebted eurozone countries under certain conditions.

The bond purchase programme, known as Outright Monetary Transactions or OMTs, has not yet been implemented by the ECB.

But the German constitutional court recently expressed reservations about the programme and referred it to the European Court of Justice for a final ruling.

"Standard monetary policy in the form of rate cuts and the accompanying communication were not enough to ensure an appropriate monetary policy stance," Draghi argued.

"The central bank should be endowed with a clear price stability mandate and, within this mandate, should be allowed – in fact obliged – to use its instruments in full independence to deliver price stability," he said.

The OMTs were one such instrument, Draghi argued. AFP

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