On Monday ECB President Mario Draghi gave a keynote address at the ECB Forum on Central Banking in Sintra, Portugal and spoke about the need for the central bank to not allow inflation to remain too low for too long in the 18 member euro area where sluggish GDP growth and low inflation threaten to keep much of Europe in the economic doldrums.
“We are not resigned to allowing inflation to remain too low for too long” Draghi said.
Draghi fell short of providing any direct clues about what type of monetary easing measures the central bank plans to undertake during its next ECB meeting in June to help stimulate the economies of the euro area.
Draghi said that the central bank expects low inflation to be prolonged but gradually return to its inflation target of near 2 percent.
Speaking about the future downside risks of low inflation, Draghi admitted that low inflation combined with expectations that prices will fall further amid tight credit in economically stressed countries are a concern for the central bank.
“What we need to be particularly watchful for at the moment is the potential for a negative spiral to take hold between between low inflation, falling inflation expectations and credit, in particular in stressed countries” Draghi said.
Addressing the causes of low inflation in the euro-area, Draghi explained that “falling commodity prices explain the lion’s share of the disinflation the euro area has experienced since the end of 2011” while pointing out that falling Brent crude and food prices accounted for around 80% of the decline in euro area HICP inflation since late 2011.
According to Draghi, the reasons for low inflation also includes the effects of relative price adjustment in economically stressed countries due to the sovereign debt crisis and credit constraints in those countries.
“This analysis suggests that credit constraints are putting a brake on the recovery in stressed countries, which adds to disinflationary pressures” Draghi stated.