ANALYSIS: ECB Dismisses Deflation Fears, Says Ready to Act

Brussels (AP) -

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 counter that threat 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 Thursday 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 swiftly use “unconventional measures … to cope with the risk of a too-prolonged period of low inflation.”

Such measures could include a new round of cheap loans to banks or large-scale purchases of financial assets, the so-called “quantitative easing” the U.S. Federal Reserve has been doing. 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.

Draghi said that unlike in its previous monthly meeting, all measures within the ECB’s mandate — including quantitative easing — were discussed.

Analysts said the ECB’s statement showed it is increasingly worried about the stubbornly low inflation, but is not at a point yet where it would act.

Carsten Brzeski of ING Bank noted Draghi’s tone clearly indicates it’s “on even higher alert than before.”

While quantitative easing still seems unlikely, Brzeski said, the ECB made it clear that such measures were now backed by all ECB members — including the German central bank governor Jens Weidmann, who had opposed such ideas in the past.

For now, Draghi said, the ECB is sticking to its forecast that the eurozone will not see deflation.

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

In a rare public rebuke, Draghi rejected advice by International Monetary Fund chief Christine Lagarde that the ECB should ease its monetary policies to boost inflation.

Draghi grinned as he took a question on Lagarde’s comments, causing laughter during the press conference in Frankfurt.

“The IMF has been of recent extremely generous in its suggestions on what we should do or not do,” he said, adding that the ECB’s views “are in essence different.”

In Europe, the inflation rate is the main driver of monetary-policy decisions — unlike in the United States, where the Fed 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.

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 it weighs on economic activity by making exports more expensive.

While influencing the exchange rate is not one of the ECB’s explicit policy targets, Draghi acknowledged the bank is closely monitoring it because “it’s an increasingly important factor in our medium-term assessment of price stability.”

The prospect of deflation is especially worrisome for those eurozone nations with high debt. When prices fall, it becomes harder to pay down debts, which are fixed in nominal terms.