Recent resilience shown by the euro area economy in the face of several negative shocks suggests it is on the right track, but it still requires monetary policy stimulus to bring inflation to the target in a sustainable way, European Central Bank President Mario Draghi said Monday.
"Our December decisions strike a balance between our growing confidence that the euro area's economic prospects are firming up, and – at the same time – the lack of a clear sign of sustained convergence of inflation rates towards the desired level," Draghi said while addressing lawmakers in the European Parliament in Brussels.
In December, the bank left all its three interest rates unchanged for a sixth consecutive session and retained its asset purchases of EUR 80 billion a month till March, but decided to reduce the size beyond that to EUR 60 billion a month till the end of this year.
"Support from our monetary policy measures is still needed if inflation rates are to converge towards our objective with sufficient confidence and in a sustained manner," he added.
Draghi attributed the recent spike in headline inflation to upward base effects and increases in energy prices. Underlying inflation pressures remain very subdued and are expected to pick up only gradually in coming months, he noted.
The lack of momentum in underlying inflation reflects largely weak domestic cost pressures, Draghi said, adding that the still significant degree of labor market slack and weak productivity developments are hurting wage growth.
"Our monetary policy strategy prescribes that we should not react to individual data points and short-lived increases in inflation. Our relevant policy horizon is the medium term," Draghi said.
"We therefore continue to look through changes in HICP inflation if we believe they do not durably affect the medium-term outlook for price stability."
The Governing Council is prepared to increase the asset purchase programme in terms of size and/or duration, if the economic situation deteriorates, Draghi reiterated.
by RTT Staff Writer
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