ECB will ease policy if inflation doesn't pick up: Draghi

Sintra, Portugal

THE European Central Bank (ECB) will ease policy again if inflation does not rise back to its target, its president Mario Draghi said on Tuesday, reinforcing expectations for even more stimulus in the coming weeks.

The ECB has undershot its inflation target of just under 2 per cent since 2013 and a slowdown in growth amid a global trade war has raised the risk that price growth will ease further, unravelling the impact of unprecedented accommodation.

"In the absence of improvement, such that the sustained return of inflation to our aim is threatened, additional stimulus will be required," Mr Draghi told the ECB's annual conference in Sintra.

He said the ECB could still cut rates, adjust its guidance, offer mitigating measures to counter the unwanted side-effects of negative rates and it also had "considerable headroom" for more asset purchases.

The comments, taken by markets as unexpectedly dovish, sent the euro down by a quarter of a percent against the US dollar while stocks erased early losses and bond yields fell further, many into record low territory. Markets have already priced in 15-20 basis points of cuts in the ECB's minus 0.4 per cent deposit rate - a big change compared to the start of the year, when rate hikes were firmly on the table.

"We will use all the flexibility within our mandate to fulfil our mandate - and we will do so again to answer any challenges to price stability in the future," Mr Draghi said.

Adding an argument for urgency of action, he noted that growth risks are tilted to the downside and indicators for the coming quarters point to lingering softness. The ECB would now use the "coming weeks" to study its options, a suggestion that indicated action from the bank may come sooner rather than later.

Mr Draghi also dismissed market concerns that asset purchases lacked potency as the ECB was coming up against its self-imposed limits, including a rule that prevents it from buying more than one-third of a particular country's debt.

He noted that the limits are flexible because the ECB's legal powers allow it to deploy tools that are both necessary and proportionate.

The ECB sees inflation at 1.4 per cent next year and market-based inflation expectations point to a slowdown in the years ahead.

But Mr Draghi said the ECB would not accept low inflation and would fulfil its mandate, even if fiscal policy did not provide the necessary support. REUTERS

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