Draghi signals ECB is ready to act on updated forecasts

The European Central Bank is ready to take action next month to boost the euro zone economy if price inflation forecasts warrant it, its president said today, cautioning countries against pressuring the bank into action.

"The Governing Council is comfortable with acting next time but before we want to see the staff projections that will come out in early June," Mario Draghi told a news conference after the ECB decided to keep its interest rates unchanged at 0.25 per cent.

He also flagged his concerns about the strength of the euro, which hit a 2-1/2 year high against the dollar as he was speaking. “We have a consensus about action, but after seeing the staff projections in early June,” he said.

Mr Draghi repeated the ECB’s commitment to keeping monetary policy loose for an extended period of time.

“We will maintain high degree of monetary accommodation and act swiftly if required with further monetary policy easing,” he said saying that all options had been on the table at the meeting that decided to keep rates unchanged.

But Mr Draghi also took a swipe at institutions and countries that have been calling for the ECB to take more action to boost the economy and counter deflationary pressures.

“We have received plenty of advice,” he said. “We are independent, so people should be aware that if this might be seen as a threat to our independence it could cause long-term damage to our credibility.”

French politicians, the International Monetary Fund and others have become increasingly vocal about calling for steps to curb the growing strength of the euro. The euro, trading at 1.38 to the dollar, has gained more than 14 per cent over the US dollar since a July 2012 low.

Mr Draghi also said that the bank was on alert to the perils of euro strength. “Strengthening of the exchange rate in the context of low inflation is cause for serious concern in view of the governing council,” he said. “The governing council is unanimous in its commitment to using also unconventional instruments within its mandate.”

The decision to leave rates unchanged was expected, as ECB policymakers await updated economic forecasts from the bank’s staff in June to assess whether to act to counter low inflation that risks becoming stuck in a “danger zone” below 1 per cent.

The ECB also left unchanged the rate it pays on bank overnight deposits at 0.0 per cent, and held its marginal lending facility - or emergency borrowing rate - at 0.75 per cent.

Mr Draghi has several policy tools at his disposal, including cutting rates or injecting more liquidity.

But the impact of such measures on the exchange rate and inflation is seen as being limited. For more impact, the ECB would need to turn on its money printing press, which is more a complicated option and not expected to happen any time soon.

Mr Draghi said in April that if the inflation outlook were to deteriorate, the ECB could respond with a “broad-based asset purchase programme”, probably quantitative easing (QE) - effectively printing money to buy assets.

Last week, however, he told German MPs at a closed-door event that while low inflation would persist in the euro zone, he did not expect deflation, a source who attended the meeting said, adding that Mr Draghi “made clear that we’re still some way off QE”.

The economy is showing increasing signs of stabilisation. Demand for home and corporate loans is expected to pick up, an ECB survey showed, while polls of euro zone business indicated on Tuesday they had a solid start to the second quarter.

Inflation rose to 0.7 per cent in April, up from 0.5 per cent in March, but still below expectations.

The bullish euro zone data helped boost the euro to its $1.39 level, near the 2½ year high hit in March, also because of the economic weakness in the United States.

The ECB’s talk about possible asset purchases also helped.