The European Central Bank (ECB) is alert to the risks posed by low inflation, and must be prepared to take action if risks surrounding weak price growth in the euro zone emerge, its president said on Monday.
"At present, our expectation is that low inflation will be prolonged but gradually return to close to 2 percent. Our responsibility is nonetheless to be alert to the risks to this scenario that might emerge and prepared for action," ECB President Mario Draghi said in remarks prepared for delivery at a conference in Sintra, Portugal.
Euro zone inflation picked up in April, but remained below expectations, maintaining pressure on the ECB to stimulate the economy. Consumer prices rose by 0.7 percent year-on-year in April, marking an uptick from March's 52-month low of 0.5 percent.
"Negative inflation rates might destabilize inflation expectations. And we know from international experience this change can happen quite quickly, especially if the objective of monetary policy is not clear," he said.
Draghi said earlier this month the ECB may consider fresh monetary policy measures at its June meeting following publication of updated economic forecasts by the bank's staff. Earlier this month, data showed that the economic recovery in the euro zone was still stubbornly slow with second-quarter gross domestic product rising by a disappointing 0.2 percent.
He left the door open as to what measures the bank might take. Among the measures available to the ECB are: a further cut in the main euro zone interest rate, setting a negative rate for banks depositing money with it, asset backed securities and some form of bond-buying program.
Developments in the exchange rate, money or capital markets that result in an unwarranted tightening of monetary and financial conditions would require adjustment of the ECB's conventional instruments, Draghi said.
But a too prolonged downward departure of inflation and/or inflation expectations from the bank's projected baseline scenario would call for a more expansionary stance, which would be the context for a broad-based asset purchase program, he said.
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