Tags: Draghi | ECB | inflation | euro

Draghi Says ECB Credibility at Stake in Hitting Inflation Goal

Monday, 25 Jan 2016 02:39 PM

Mario Draghi said the European Central Bank must fulfill its inflation mandate in order to maintain its credibility.

“Meeting our objective is about credibility,” the ECB president said in a speech near Frankfurt on Monday. “If a central bank sets an objective, it can’t just move the goalposts when it misses it.”

ECB policy makers have less than seven weeks until a March 10 meeting when they’ll decide whether their 1.5 trillion-euro ($1.6 trillion) bond-purchase plan and negative interest rates are enough to meet their inflation goal of just under 2 percent. With slumping oil costs weighing on consumer prices that are already close to stagnating, Draghi is trying to convince investors that the central bank remains willing to act if needed.

“With inflation already low for some time, we saw a danger that a continued period of low inflation –- even if oil-driven - – might destabilize inflation expectations and become persistent,” Draghi said referring to the ECB stimulus package announced in December 2015. “That risk was heightened by the fact that ‘core’ inflation, which strips out energy and food, was also low. Core inflation is not our objective, but it tends to lead headline inflation over the medium-term.”

Inflation in the 19-member euro area hasn’t touched its goal since early 2013. While a report due Friday will show the rate picked up to 0.4 percent in January from 0.2 percent the previous month, according to a Bloomberg surveyof economists, Draghi has said it could turn negative in coming months. In December, core inflation stood at 0.9 percent.

Worryingly for the central bank, crude costs have become increasingly correlated with inflation expectations.

The ECB’s December staff forecasts predicted that inflation would average 1 percent this year and 1.6 percent in 2017. Governing Council member Klaas Knot said on Sunday that this year’s projection can be “binned because of the oil-price drop.”

Draghi said in a press conference last week that the ECB has the instruments and the “determination, and the willingness and the capacity” to fight to uphold its price-stability mandate. The Governing Council didn’t want to discuss specific instruments and the ECB’s technical committees will study options, he said.

Under the current program, the ECB buys 60 billion euros a month of government and agency debt, covered bonds and asset- backed securities. Policy makers agreed last month to extend the range to include the regional debt of euro-area member states.

Economists at JPMorgan Chase & Co. and Royal Bank of Scotland Group Plc changed their forecasts for more easing to March from June after last week’s press conference. Markets rallied, with the Standard & Poor’s 500 Index posting its strongest two-day rally in three months.


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Economy
Mario Draghi said the European Central Bank must fulfill its inflation mandate in order to maintain its credibility. "Meeting our objective is about credibility," the ECB president said.
Draghi, ECB, inflation, euro
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2016-39-25
Monday, 25 Jan 2016 02:39 PM
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