The euro zone area will experience low inflation for a protracted period of time but it was not at risk of deflation, European Central Bank (ECB) President Mario Draghi said Thursday, leading to a pop in the euro.
Draghi sought to play down concerns over deflation in the region, arguing that the euro area was not like Japan in 1990s. The euro was 0.6 percent higher at $1.3608 in mid-afternoon trading Thursday.
His comments came after the European Central Bank (ECB) and the Bank of England (BoE) left interest rates unchanged, as both central banks awaited fresh forecasts in the coming weeks to decide on what new policy action was required.
The BoE left rates at 0.5 percent and the ECB also left its key interest rate unchanged 0.25 percent.
Last Friday official data revealed that inflation fell to 0.7 percent in January – below the 0.9 percent expected by economists, and significantly lower than the ECB's 2 percent target. The last time inflation came in at this level – when it slid to a 47-month low in October 2013 – the bank cut its main interest rate to 0.25 percent from 0.5 percent in response.
Some expected the risk of deflation would force Draghi to introduce new policy action, the ECB President told a press conference that incoming information confirmed that the moderate recovery of the euro zone area economy was proceeding in line with the bank's assessment.
He added: "Underlying price pressures in the euro area remain weak and monetary and credit dynamics are subdued. Inflation expectations for the euro area over the medium term to long term continue to be firmly anchored in line with our aim of maintaining inflation rates below but close to 2 percent."
He repeated the bank's pledge to keep interest rates "at present or lower levels for an extended period of time" and said the bank was firmly determined to take further decisive action. The euro shot up against the dollar following his comments.
(Read more: Live Blog: ECB and Bank of England rate decisions)
Change coming from the BoE?
Analysts had not expected a major announcement from the BoE, but policy makers will certainly be looking ahead to quarterly economic forecasts due next Wednesday, which will provide clues as to how forward guidance will change.
BoE officials will be trying to figure out how to direct interest rate expectations now that the U.K. economy is improving.
Soon after Governor Mark Carney took over at the bank last summer, he announced that the central bank would not raise interest rates until U.K. unemployment hit 7 percent, which it expected in 2016. In July 2013, it stood at 7.8 percent, but has now shrunk to a whisker away from that figure.
The latest figures from the Office of National Statistics showed that between September and November 2013, the unemployment rate fell to 7.1 percent, the lowest level since the January-March period of 2009.
Inflation in Britain also fell more than expected in December, hitting the BoE's 2 percent target for the first time since November 2009, while surveys this week showed British manufacturing and services sustaining strong growth through January.