Measures will push inflation up: ECB

July 05, 2014 - 6:09:16 am
ECB President Mario Draghi (right) and Vice-President Vitor Constancio at the monthly news conference in Frankfurt. 

FRANKFURT: A raft of policy measures introduced last month will help lift inflation and support bank lending but the European Central Bank stands ready to create money in future if required, President Mario Draghi said.

The ECB left interest rates steady a month after cutting them to record lows and pushing the deposit rate into negative territory for the first time — effectively charging banks for holding their money overnight to prompt them to lend to businesses.

The measures unveiled in June also included extending the duration of unlimited cheap liquidity for banks until the end of 2016, and offering them a four-year loan plan. Detailing the loan plan, Draghi said banks must use the new funds to lend or else they will be made to pay back the money. He said last month’s measures had further loosened the eurozone’s monetary policy stance.

“The monetary operations to take place over the coming months will add to this accommodation and will support bank lending,” he told a news conference after the ECB left its key rate at just 0.15 percent. “As our measures work their way through to the economy, they will contribute to a return of inflation rates to levels closer to 2 percent.”

The eurozone inflation rate held at 0.5 percent last month, well below the ECB’s target of close to but below two percent and in what Draghi has called the “danger zone”.

If people and firms began deferring spending plans on the basis that they expected prices to fall, an economic downward spiral of the sort suffered by Japan could take hold. The ECB says its sees no sign of that. Draghi said the ECB’s Governing Council was united in its willingness to launch into quantitative easing — essentially creating money to buy government or private debt from banks to keep borrowing costs low and boost spending — if inflation headed lower still. Reuters

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