Though the robust economic expansion provides confidence that euro area inflation will hit the target in future, it is yet to show any convincing trend of a pick up, prompting policymakers to delay a review of the massive stimulus until the fall, European Central Bank President Mario Draghi said Thursday.
"Headline inflation is dampened by the weakness in energy prices," Draghi said in his introductory statement to the post-decision press conference. "Moreover, measures of underlying inflation remain overall at subdued levels."
"Therefore, a very substantial degree of monetary accommodation is still needed for underlying inflation pressures to gradually build up and support headline inflation developments in the medium term," he added.
Earlier on Thursday, the Governing Council left all the three interest rates and its EUR 60 billion monthly asset purchases that are set to run until the end of the year, unchanged. The bank also kept its forward guidance intact, thus retaining the easing bias on asset purchases.
"If the outlook becomes less favorable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, we stand ready to increase our asset purchase programme in terms of size and/or duration," Draghi reiterated.
Responding to reporters, Draghi said the Governing Council was unanimous in communicating the forward guidance and in setting no precise data to discuss changes to the policy stance in future.
"The last thing" the ECB want is an unwarranted tightening of financial conditions, Draghi told reporters.
However, he later suggested that any discussion of reviewing the policy stance would take place only in the fall.
That is in line with market expectations and the euro and bond yields moved higher following this remark.
The next ECB rate-setting session is scheduled for early September.
Draghi and his colleagues are expected to drop any hint of a gradual withdrawal of stimulus, or tapering, in September. According to them, a possible tapering move is likely to be announced for January after the end of the on-going round.
Some analysts also expect Draghi to hint then that an interest rate hike will come only after the withdrawal of stimulus.
"We need to be persistent and patient and prudent, because we are not there yet," Draghi said regarding euro area inflation.
After his comments at a central banking forum in Sintra, Portugal in late June, fed market expectations of an imminent tapering and send yields and the euro soaring, Draghi was very careful with each word he spoke so as to avoid the kind of market turbulence dubbed "taper-tantrum".
Referring to his Sintra speech, where he said reflationary pressures have replaced deflationary ones allowing for some adjustment in policy parameters, Draghi said that was not much different from the ECB's current assessment.
"Measures of underlying inflation remain low and have yet to show convincing signs of a pick-up, as domestic cost pressures, including wage growth, are still subdued," Draghi said in his statement.
The risks to the euro area growth outlook remain broadly balanced and downside risks primarily relate to existing global factors, he added.
by RTT Staff Writer
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