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ECB ready to take ‘additional’ measures to tackle deflation

Mario Draghi has predicted 2014 and 2015 will be ‘years of recovery’ for Europe, but admits that recovery remains conditional on the central bank continuing its current economic policies.

In a speech in Vienna yesterday, the governor of the European Central Bank stated that the bank needs to continue its policies of growth-friendly fiscal consolidation, structural reforms and a committed monetary policy “guarding against all threats to the integrity of our money – in particular, the risk of both too high and, currently more relevant, too low inflation”.

In spite of the concerns of many about the main risk to Europe’s recovery being deflation, rather than inflation, the governor stated: “At present, risks of deflation, which would of course make the deleveraging process harder, are quite limited. In fact, inflation excluding energy and food started to increase slightly from 0.7 per cent in December to 0.8 per cent in January and to 1 per cent in February.”

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But he admitted: “The longer inflation remains low, the higher the probability of such risks emerging. That is why the ECB has been preparing additional non-standard monetary policy measures to guard against such a contingency and why it stands ready to take further decisive action if needed. Any material risk of inflation expectations becoming unanchored will be countered with additional monetary policy measures.”

In his speech he also highlighted the benefits of the deleveraging and repairs to the European banking system and noted that the forward guidance from the ECB on interest rates supports the deleveraging process.

But Mr Draghi added: “Our forward guidance also has a further effect. As the on-going recovery proceeds in line with our projections, the significant slack in the economy will begin to be absorbed, and inflation will gradually increase towards levels closer to 2 per cent.”