Draghi says better to act too early than too late on low inflation

The risk of acting too late on ultra-low inflation is greater than that of acting too early, European Central Bank president Mario Draghi said on Thursday, suggesting more policy easing may be needed.

Adopting a wait-and-see stance because of the oil price shock and letting low inflation become entrenched would erode long-term expectations and confidence in the central bank, leading to persistently weaker price pressure, Mr Draghi told a conference at the Bundesbank, Germany's central bank.

“If that were to happen, we would need a much more accommodative monetary policy to reverse it,” Mr Draghi said. “Seen from that perspective, the risks of acting too late outweigh the risks of acting too early.”

The ECB has raised the prospect of further easing as soon as March and investors have already priced in a deposit rate cut and possible adjustments to the bank’s €1.5 trillion quantitative easing programme.

The ECB targets inflation at just under 2 per cent but has undershot that target for three straight years and is unlikely to return to it to for years to come given low oil prices, lacklustre economic growth, weak lending and only modest wage rises in the euro zone.

“If we do not surrender to low inflation - and we certainly do not - in the steady state it will return to levels consistent with our objective,” Mr Draghi said.

Mr Draghi also dismissed suggestions that the ECB has run out of policy tools and said the bank needed to accept the risk of using unconventional ones.

“There can be no doubt that if we needed to adopt a more expansionary policy, the risk of side effects would not stand in our way,” Mr Draghi said. “We always aim to limit the distortions caused by our policy, but what comes first is the price stability objective.”

Reuters