ECB holds rates steady but is 'ready to act' on inflation
THE European Central Bank signalled it is ready to deploy anything in its monetary policy toolbox if inflation stays too low for too long despite keeping interest rates steady yesterday.
The ECB held its main interest rate at a record low of 0.25pc and the rate for bank deposits at central banks at zero, hoping the eurozone recovery will gain strength unaided.
But ECB chief Mario Draghi said he and his colleagues expected a prolonged period of low inflation and if it dragged on too long action would be taken. That marked a significant shift from last month when he appeared to set quite a high bar to action.
"We will monitor developments very closely and we will consider all instruments available to us," Mr Draghi said. "We are resolute in our determination to maintain a high degree of monetary accommodation and act swiftly if required."
He emphasised that any policy shift could be over and above interest rate moves, saying: "The Governing Council is unanimous in its commitment to using also unconventional instruments within its mandate in order to cope effectively with risks of a too prolonged period of low inflation."
He added that printing money – quantitative easing – had been discussed at yesterday's policy meeting.
Having barely reacted to the earlier policy decision, Mr Draghi's comments saw the euro drop to a session low against the dollar.
Eurozone inflation fell to 0.5pc in March, levels last seen when the economy was deep in recession in 2009, but it was driven by the kind of softer food and energy prices the bank usually judges as temporary.
Mr Draghi said the risk of deflation remained limited and labelled the latest inflation figures hard to read, partly because Easter holidays fall in April this year, thereby delaying the impact of rising travel and hotel prices at a time when many people take a holiday.
Policymakers have been willing in recent weeks to publicly broach cutting deposit rates below zero – effectively charging banks to hold cash with the ECB – or embarking on bond purchases as the US, Japan and Britain have, if the threat of deflation became more acute. Most notably, Bundesbank chief Jens Weidmann has said creating money via quantitative easing was not out of the question.
One reason for that appears to have been the strength of the euro, which will bear down on import prices, depressing inflation further. One aim of flagging possible future action could be to try and talk the currency down.
Pressure from abroad to act has mounted, most notably from the International Monetary Fund, which has warned of the threat of "lowflation" rather than outright deflation.
"More monetary easing, including through unconventional measures, is needed in the euro area," IMF head Christine Lagarde said on Wednesday.