ECB's Draghi sees no sign of deflation
EUROPEAN Central Bank President Mario Draghi (pictured) has said he sees signs of a "dramatic" improvement in the health of the euro-area economy and that inflation will gradually return to target.
"What we have been seeing in the past three or four months is both the improvement in financial markets and that our accommodative monetary policy is finally being passed through to the real economy," Mr Draghi said at the World Economic Forum in Davos, Switzerland.
He said: "The idea is that now we have low inflation, and it will move gradually back to the objective" (just under 2pc).
Even as the ECB chief portrays a euro-area rebound, banks are predicting that the Frankfurt-based ECB will have to cut its benchmark interest rate in the coming months as volatility in money markets threatens to derail the recovery.
Mr Draghi, who has promised to take action to safeguard price stability if needed, also said there was no reason to believe current subdued price increases would turn into deflation.
"If you define deflation as a broad-based, self-feeding, persistent fall in prices, broad-based across sectors and countries, we don't see that."
Even so, the recovery was "still weak, fragile and uneven" and the risks to the outlook remained on the downside.
The ECB forecasts that the euro-area economy will grow 1.1pc this year after an estimated contraction of 0.4pc in 2013. Inflation is forecast to be 1.1pc this year and 1.3pc in 2015.
Mr Draghi said that the ECB's upcoming health check of European banks would help to make monetary policy more effective, as interest-rate signals will be better passed through to the real economy.
Before taking over supervision of around 130 of the region's biggest banks in November, the ECB is probing asset quality and subjecting lenders to tests of their ability to withstand financial turmoil.
Mr Draghi said in October that he would not hesitate to fail weak banks.