Mario Draghi Warns of Low Inflation Into 2015

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Mario Draghi discussed potential future moves of the European Central Bank at the press conference after its monthly meeting held yesterday, Bloomberg reports. Among the options that the bank will be considering are lowering the deposit rate to below zero and establishing funds for banks to lend directly to businesses, Draghi said.

The European Central Bank voted to keep its primary interest rate unchanged at 0.25 percent yesterday. That came after the bank had decreased the rate from 0.5 percent last month amid fears of so-called “deflationary pressures,” adverse effects that can result from inflation rates that are too low. By too low, the central bank has targeted inflation at just under 2 percent, so October’s 0.7 percent statistic certainly qualified.

At the press conference, Draghi said that the bank’s move had already had a tangible impact, pointing to inflation rates that rose to 0.9 percent in the month of November. Draghi said that the data “fully justified” the ECB’s decision, and that at this point there was no questioning the past actions of the bank. The focus of meeting was instead of what additional measures may be necessary in the future.

Draghi presented the bank’s executives with his outlook on inflation in the coming months, saying that he does not see a rise to acceptable levels until the end of 2015. This would leave a two-year period in which the bank will have to be ready to act should rates drop once more. With the primary refinancing rate already at historic lows, Draghi discussed some of the other options that are on the table for the ECB.¬†One such move would be lowering the deposit rate, which currently stands at 0 percent. This action, which Vitor Constancio, the bank’s vice president, had reviewed skeptically, was also approached cautiously by Draghi, who said that it has never been attempted on such a large scale and is a move that the bank is likely to hold in reserve in case of emergency-type conditions.

What is much more probable — according to both analysts and Draghi — is the creation of a third LTRO, or long-term funding operation. The first two instances pumped billions of euros into the regions banks in years past, but they are on the verge of being repaid. The third round of lending, Draghi said, would come with stipulations to lend the money to organizations such as businesses. What Draghi does not want is the funds to be used to acquire sovereign debt or to pad holes in balance sheets, which were two of the primary weaknesses of the first two operations.

The LTROs do have the advantages of increasing liquidity across the region, holding market interest rates down, and helping to combat low inflation rates. However, some have questioned the ECB’s proactive stance toward fluctuations in indicators that have left the organization handing out billions in cash and becoming more and more involved in the region’s financial workings. Draghi, for his part, has praised the proactive approach, overseeing the bank’s transition into supervising European financial institutions over the course of the next year.

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