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Draghi says ECB must be particularly watchful on low inflation

By Jeff Black & Alessandro Speciale

European Central Bank President Mario Draghi signaled policy makers are ready to take action in June should they see low inflation becoming entrenched.

“What we need to be particularly watchful for at the moment is, in my view, 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 in a speech at the ECB Forum in Sintra, Portugal. “We are not resigned to allowing inflation to remain too low for too long.”

Draghi said the key issue for the ECB right now is the timing of any action. Officials have said they’re working on a package of possible measures for the June 5 policy meeting, including interest-rate cuts and liquidity injections, while holding out the prospect of quantitative easing as a more powerful option.

Draghi didn’t elaborate on any possible measures beyond his comments after the May 8 policy meeting, when he said officials were “comfortable” with acting next time and willing to use unconventional instruments if needed.

ECB Vice President Vitor Constancio said the conference won’t address current monetary-policy issues, and will focus on academic research papers.

Lagarde Address

The event in Sintra is the ECB’s answer to the U.S. Federal Reserve’s annual monetary conference in Jackson Hole, Wyoming. Nobel Laureate Paul Krugman and Princeton University’s Markus Brunnermeier are among the delegates to address the getaway at Penha Longa, a resort that traces its origins back to a 14th century monastery.

IMF Managing Director Christine Lagarde delivered the opening address yesterday, and warned policy makers that a new range of instruments, known as macroprudential tools, to foster financial stability aren’t proven.

ECB Executive Board members Constancio, Peter Praet and Benoit Coeure will chair panel discussions today and tomorrow, which will include examinations of the role of such instruments in the central-bank repertoire. Draghi will wrap up with closing remarks tomorrow afternoon.

[Bloomberg]

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