Arab Today, arab today ecb chief mario draghi warns of acting too late on inflation
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ECB chief Mario Draghi warns of 'acting too late' on inflation

Arab Today, arab today

Arab Today, arab today ECB chief Mario Draghi warns of 'acting too late' on inflation

European Central Bank chief Mario Draghi
Frankfurt - AFP

European Central Bank chief Mario Draghi warned Thursday of the risk of acting "too late" to counter stubbornly low inflation in the euro area, in comments likely to fuel speculation that the ECB is preparing new stimulus moves soon.

"In a context of prolonged low inflation, monetary policy cannot be relaxed about a succession of supply shocks," Draghi said in a lecture delivered at a conference organised by the German central bank, the Bundesbank.

"Adopting a wait-and-see attitude and extending the policy horizon brings with it risks: namely a lasting de-anchoring of expectations leading to persistently weaker inflation," Draghi argued.

"And if that were to happen, we would need a much more accommodative monetary policy to reverse it. Seen from that perspective, the risks of acting too late outweigh the risks of acting too early."

The ECB has already slashed interest rates to historic lows, pumped unprecedented amounts of liquidity into the financial system and launched a massive bond purchase programme known as quantitative easing or QE to try and kick-start inflation in the 19 countries that share the euro.

But consumer prices in the region rose by a meagre 0.4 percent in January, a long way off the level of 2.0 percent that the ECB views as conducive to healthy economic growth.

As a result, Draghi suggested last month that further policy action could be taken in March if the bank feels that the persistently low level of inflation is an increasing threat to economic recovery. 

One of the chief factors behind the current low levels of inflation -- which is termed by economists as "disinflation" -- are falling oil prices.

And in principle, lower energy prices are a boon to consumers and businesses, because lower fuel bills increase spending power.

Because such phenomena tend to be transitory, some observers argue that the ECB should look past falling oil prices and simply extend the time horizon for area-wide inflation to return to target levels.

"There are some who argue that, so long as we are experiencing mainly positive global supply shocks, there is no need for central banks to be overly responsive. We can simply redefine the medium-term horizon over which price stability is maintained and 'wait it out' until inflation returns to our objective," Draghi said.

But "surrendering" to low inflation and capitulating to "inexorable disinflationary forces" would ultimately only serve to perpetuate disinflation, Draghi said. 

"There are forces in the global economy today that are conspiring to hold inflation down. Those forces might cause inflation to return more slowly to our objective. But there is no reason why they should lead to a permanently lower inflation rate," he said.

"What matters is that central banks act within their mandates to fulfill their mandates. In the euro area, that might create different challenges than it does in other jurisdictions. But those challenges can be mitigated. They do not justify inaction," Draghi said.

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