World Economy

ECB ready to fight deflation, keeps eye on euro: Draghi

Mario Draghi, president of the European Central Bank (ECB).
Melmet Kaman | Anadolu Agency | Getty Images

The European Central Bank has been preparing additional policy steps to guard against deflation taking hold in the euro zone as the strong euro weighs on prices, ECB President Mario Draghi said on Thursday.

The risks of deflation were "quite limited," Draghi said in a speech at an award ceremony in Vienna, but the longer inflation remained low, the higher the probability of deflationary 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,'' Draghi said in the text of his speech.

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"Any material risk of inflation expectations becoming unanchored will be countered with additional monetary policy measures," he added.

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Draghi struck a more dovish tone than he did a week ago at his monthly post-policy meeting news conference, when he said there had been no reason for the ECB to act as the recovery was continuing and recent data had been by and large positive.

The euro rose against the dollar to a 2-1/2 year high after the ECB last week signaled no need for new economic stimulus, a development the ECB watched with unease.

ECB Vice President Vitor Constancio said on Tuesday markets had missed the a key message.

(Watch: What do analysts expect from Draghi?)

On Thursday, Draghi said the euro exchange rate was "becoming increasingly relevant in our assessment of price stability" given the current levels of inflation and that the effective euro exchange rate certainly had a significant impact on the low inflation rate over the past year and a half.

Draghi reiterated the ECB's guidance that it would keep interest rates at present or lower levels for an extended period and said significant slack in the economy would begin to be absorbed, and inflation would gradually increase towards levels closer to 2 percent as the recovery continued.

(Watch: Is the euro going up for the wrong reasons?)

"Our forward guidance therefore creates a de facto loosening of policy stance, as real interest rates are set to fall over the projection horizon," Draghi said.

The real interest rate spread between the euro zone and the rest of the world would probably fall, he said, thus putting downward pressure on the exchange rate, everything else being equal.

—By Reuters