Thursday, February 6, 2014

ECB says euro area in prolonged low inflation period

    The European Central Bank (ECB), which earlier today maintained its benchmark refinancing rate at a record low of 0.25 percent, said the 18-nation euro area was "experiencing a prolonged period of low inflation"and reiterated that it expects to keep interest rates "at present or lower levels for an extended period of time."
    In his prepared statement to a press conference, ECB President Mario Draghi repeated his guidance from last month that the accommodative monetary stance would be maintained "for as long as necessary" and the bank was ready to consider all available instruments and "to take further decisive action if required" to ensure that a rise in money market rates do don't impact the bank's easy policy.
    Most economists had expected the ECB to maintain its rates today but news of another drop in euro area inflation to 0.7 percent in January had led some economists to forecast a rate cut, either to the refi rate or the deposit rate, or even a form of quantitative easing through bond purchases.
    Draghi acknowledged that January's inflation rate was lower than generally expected but this was due to energy prices. Based on current prices, he expects inflation to remain around the current level in coming months and price pressures will remain subdued.

    But Draghi said the ECB still expects a gradual rise in inflation toward the target of "below, but close to 2% percent,"but a new forecast in early March would throw further light of the outlook.
    In its current forecast, the ECB expects average inflation of 1.1 percent in 2014 and 1.3 percent in 2015.
   Draghi also said the latest information confirms the bank's forecast of a moderate economic recovery, with output expected to recover slowly on the back of an improvement in domestic demand as real income is supporters by lower energy price inflation and a gradual improvement in exports.
    But the risks surrounding the economic outlook continue to be on the downside, Draghi said, referring to the potential for recent developments surrounding emerging market economies to have a negative impact on the euro areas economic conditions.
    Other downside risks include weaker than expected domestic demand and export growth along with slow of insufficient implementation of structural reforms.
    The ECB forecasts economic growth of 1.1 percent this year and 1.5 percent in 2015 after an estimated contraction of 0.4 percent in 2013 and a 0.6 percent contraction in 2012.
    The latest official data shows that Gross Domestic Product in the euro area expanded by 0.1 percent in the third quarter from the second quarter for an annual contraction of 0.3 percent, the seventh consecutive quarterly contraction on an annual basis.


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