The European Central Bank is ready to intervene if inflation remains low for too long, President Mario Draghi has said, adding that he was certain the eurozone will escape the fate of Japan.
However Draghi, pictured, kept his cards close to his chest, and declined to discuss in detail the instruments it could use to counter any prolonged weakness in prices.
Speaking yesterday, he pointed out that the reason banks were not lending was not because they lacked funding, suggesting more long-term ECB loans are unlikely for now.
Eurozone inflation has fallen far below the ECB's target of less than -- but close to -- 2pc in recent months, as the bloc crawls out of recession and banks try to clear their balance sheets of assets that turned sour.
The situation reminds some observers of Japan in the 1990s after the burst of a real-estate bubble pushed the country into a deflationary cycle from which it has still not fully recovered.
"We are fully aware of the downward risks that a protracted period of low inflation entails," Draghi told the European parliament. "The Governing Council is ready and able to act if needed."
"We don't see a situation like Japan," Mr Draghi said.
"We looked at the differences, and the differences are essentially that medium-to long-term inflation expectations are firmly anchored in our case; they were not in Japan of the early '90s, early 2000s."
He stressed that there were no deflationary risks in the eurozone, and that monetary stimulus in the eurozone had been much stronger than it was in Japan at that time.
The ECB cut its main refinancing rate to a record low of 0.25pc in November, alarmed after eurozone inflation fell to 0.7pc in October.
It has also injected more than €1tn into the banking system, to ease funding strains.
Banks have repaid about 40pc of those funds, Mr Draghi pointed out, and he said risk-aversion and a lack of capital were among the reasons why banks were not lending to the real economy -- and not a lack of funding.
A bank's capital is the money it cannot lend and must hold as a buffer against risk, while funding refers to how it gets money that it can then lend out.
The repayments mean that excess liquidity -- the amount of money in the market beyond what banks need for their day-to-day operations -- is falling, putting upward pressure on interbank lending rates, potentially crippling the recovery.
"Excess liquidity in overnight money markets has been gradually receding. We are monitoring the potential impact of these developments on our monetary policy stance.
"We are ready to consider all available instruments," Mr Draghi concluded. (Reuters)