The European Central Bank will not surrender to low inflation, Mario Draghi vowed, reinforcing his case for ECB action next month to counter deteriorating global conditions.

The ECB president made his remarks in the regional offices of Germany’s Bundesbank, which has fiercely opposed Mr Draghi’s desire to expand a bond buying programme as a way to ease monetary policy.
“The risks of acting too late outweigh the risks of acting too early,” Mr Draghi told an audience that included Jens Weidmann, the Bundesbank chief and well known monetary hawk.

Action at next month’s meeting could include more quantitative easing or a further interest rate cut. Measures taken in December fell short of analysts’ expectations.

“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.

“If, on the other hand, we capitulate to inexorable disinflationary forces or invoke long periods of transition for inflation to come down, we will in fact only perpetuate disinflation.

”The risk of a destabilising bout of deflation — in which falling prices undermine demand and weigh down growth — has added to the pressure on monetary policymakers across the world. They have struggled and largely failed to meet inflation targets in the wake of the financial crisis.

Senior ECB officials are concerned that the most recent slide in the price of crude oil may prompt a second wave of low inflation, dragging down wage growth and expectations of future price rises.

But while Mr Draghi said officials “cannot be relaxed” about such second-round effects, the Bundesbank and Mr Weidmann have claimed there is no evidence to support the argument that the fall in the price of oil acts as a disinflationary pressure on the broader economy.

Mr Draghi took aim at critics who claim central banks should accept permanently low inflation — because of ageing populations and technological change.

“There are forces in the global economy today that are conspiring to hold inflation down. Those forces might cause inflation to return more slowly to our objective,” he said. “But there is no reason why they should lead to a permanently lower inflation rate.”

Mr Draghi added: “What matters is that central banks act within their mandates to fulfil their mandates. In the euro area, that might create different challenges than it does in other jurisdictions. But those challenges can be mitigated. They do not justify inaction.”

The ECB’s inflation target is below but close to 2 per cent. But inflation is now 0.4 per cent and has been below 1 per cent for more than two years. Inflation is set to fall further in the months ahead as a result of the oil price slump.

Mr Draghi said Japan’s experience illustrated how global monetary policymakers could lift inflation if they were fully committed to doing so.

“As long as the commitment of the Bank of Japan to a low positive inflation number was not clear, actual inflation and inflation expectations stayed in deflationary zone,” he said. “Since the Bank of Japan has signalled its commitment to reach 2 per cent inflation, however, core inflation has risen from less than -0.5 per cent in 2012 to close to 1 per cent today.”

Mr Draghi added: “We now have plenty of evidence that, if we have the will to meet our objective, we have the instruments.”

Source: Financial Times