Draghi Softens Tone on Inflation, Risks ‘Broadly Balanced’

Bloomberg: European Central Bank President Mario Draghi softened his tone on the inflation outlook, saying the risks are now “broadly balanced.”

While inflation will remain above the ECB’s 2 percent limit this year, it will slow in 2013 and “underlying price pressures should remain modest,” Draghi told lawmakers in Brussels today. On April 4, Draghi spoke of “upside risks” to price stability and said the ECB would address them if needed in a “firm and timely manner.”

Draghi stepped up his rhetoric on price risks in March after the ECB lifted its inflation forecast for this year to 2.4 percent. Since then, the sovereign debt crisis has worsened, threatening to derail the fragile economic recovery in Europe, and oil prices have eased.

“Risks to the outlook for price developments are broadly balanced,” Draghi said today. “Upside risks could stem from higher than expected oil prices and further indirect tax increases; downside risks could arise from weaker than expected economic activity.”

Budget cuts by governments and surging unemployment are curbing economic growth. Euro-area services and manufacturing output declined for a third month in April, business confidence fell in March and industrial orders dropped for a second month in February.

 

‘Growth Compact’

Draghi, whose call for a fiscal compact to toughen budget rules was adopted by European Union leaders, today urged them to take similar steps to foster growth.

“We’ve had a fiscal compact,” he said. “What is most present in my mind now is to have a growth compact. I think that’s what we have to have.” He didn’t elaborate.

The economy of the 17 euro nations shrank 0.3 percent in the fourth quarter of 2011 and the ECB predicts a contraction of 0.1 percent for this year as a whole.

While “available indicators for the first quarter of 2012 broadly confirm a stabilization in economic activity at a low level,” risks to the economic outlook remain on the downside, Draghi said.

“Growth should be supported by foreign demand, the very low short-term interest rates as well as our non-standard measures,” he said. “At the same time, downside risks relate in particular to a renewed intensification of tensions in euro- area sovereign debt markets and their potential spillover to the real economy.”

 

Exit Talk ‘Premature’

The ECB has injected more than 1 trillion euros ($1.3 trillion) of cheap cash into the banking system for three years to avert a credit crunch. While debt markets rallied after the tenders in December and February as banks used some of the liquidity to buy government bonds, that effect is waning.

Spanish 10-year yields breached 6 percent last week and the cost of insuring the country’s bonds against default advanced to a record.

“Any exit strategy is premature given the current economic situation,” Draghi said. While the bank’s bond-purchase program has been inactive for six weeks, “we don’t want to pre-commit” on whether it will be cancelled altogether or restarted, he said. “We abstain from making announcements in either direction now. The reason is that the uncertainty about the present situation is very, very high.”

Draghi also said the ECB’s monetary policy is “quite accommodative” and not too tight.

reporter on this story: Jana Randow in Frankfurt