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ECB dismisses deflation fears, says ready to act

By Juergen Baetz

Associated Press

Published: Thursday, April 3 2014 11:35 a.m. MDT

President of European Central Bank, ECB, Mario Draghi waits for the beginning of a news conference in Frankfurt, Germany, Thursday, April 3, 2014, following a meeting of the ECB governing council. The ECB decided to leave its main interest rate unchanged.

Michael Probst, Associated Press

BRUSSELS — The European Central Bank on Thursday dismissed fears that consumer prices might fall in the 18-nation eurozone, a situation that would drag down the economy. It stressed, however, that it is ready to act in new ways if needed.

Another drop in the inflation rate in March, to 0.5 percent, raised concerns the eurozone might slip into deflation, when consumers put off purchases in hopes of bargains later and companies cut prices to entice buyers. Such a downward spiral can snuff out economic growth for years.

After the ECB decided to leave its main interest rate at a record-low 0.25 percent and not provide any further stimulus, President Mario Draghi noted the inflation figures are consistent with the bank's forecasts of a "prolonged period of low inflation."

But to show it is not complacent about the danger, the central bank beefed up its rhetoric.

Draghi said the ECB's governing council is "unanimous" in its determination to maintain a highly accommodative monetary policy stance and is ready to use "also unconventional measures ... to cope with the risk of a too prolonged period of inflation."

Such measures could include a new round of cheap loans to banks or large-scale purchases of financial assets, as the U.S. Federal Reserve has done. That would increase the amount of money in the economy and aim to lower market interest rates and stoke inflation. But such a move faces legal, political and technical obstacles.

The ECB could also trim its deposit rate below zero, effectively penalizing banks for holding money at the ECB instead of lending it out in the economy.

Draghi said the recent inflation data mean the ECB must be vigilant, but that it sticks to its forecast that the eurozone will not see deflation.

"We don't see the risk of deflation as having increased," Draghi said.

The ECB chief noted the unexpectedly low inflation data for March was also influenced by seasonal factors, meaning the rate may well rise next month.

For the central bank to act on the data, "we need more info whether there has been a change in the medium-term outlook," he said.

In Europe, the inflation rate is the main driver of monetary policy decisions — unlike in the United States where the Federal Reserve also takes unemployment figures into account. The ECB aims to keep inflation close to but just below 2 percent.

Unemployment, meanwhile, remains stuck near a record-high of around 12 percent following years of economic and financial upheaval. In the countries hardest-hit by the crisis like Greece and Spain, more than one in four people are still jobless.

Besides having a social cost, high unemployment also weighs on consumption and the wider economy. The EU predicts the eurozone will grow 1.1 percent this year. While that would be the bloc's best performance since 2011, it would still pale in comparison to the U.S. economy, which is expected to grow around 3 percent.

This latest dip in inflation comes at a time when the euro has been buoyant in foreign exchange markets. A higher currency can push inflation further down in two ways: It can make imports cheaper and weigh on economic activity by making exports more expensive on international markets.

The prospect of a looming deflation is especially worrisome for those eurozone nations already unable to support growth because of their high debt levels. When prices fall, it becomes harder to service debts, which are fixed in nominal terms.

AP writer Geir Moulson in Berlin contributed reporting. Follow Juergen Baetz on Twitter at http://www.twitter.com/jbaetz

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