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Draghi Has No Intention of Tightening Monetary Policy as Target Inflation is Well Under Control

“European Central Bank President Mario Draghi signaled the bank has no intention of tightening monetary policy anytime soon with inflation projected to “significantly” undershoot its 2 percent target next year.

While the ECB’s balance sheet may shrink naturally as confidence returns to financial markets and banks repay emergency loans, policy makers are “far” from considering an exit from monetary stimulus, Draghi said at an event in Munich late yesterday. “We foresee for next year an inflation rate which is significantly lower than 2 percent.”

The ECB has cut its benchmark interest rate to a record low of 0.75 percent, extended over 1 trillion euros ($1.3 trillion) in cheap loans to banks and pledged to buy the bonds of debt- strapped nations if they agree to economic reforms. The ECB in December forecast the 17-nation euro economy will contract 0.3 percent this year and inflation will slow to 1.4 percent in 2014. It is due to update the forecasts next week.

While conditions on financial markets are improving, Draghi said the euro-area economy is still “weak” and the ECB’s accommodative policy will help to drive a “gradual recovery” in the course of 2013.

“It is clearly too early to pull the carpet as risks are still to the downside,” said Thomas Costerg, an economist at Standard Chartered Bank in London. At the same time, “we cannot ignore that there seems to be growing underlying accommodation fatigue among central bankers,” he said.

ECB Warning

Two ECB Executive Board members yesterday warned about the risks of leaving emergency measures in place for too long…..”

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