Draghi Says ECB Should Be Vigilant on Low Inflation

European Central Bank President Mario Draghi, hinted that policy makers are prepared to take measures in June if they observe low inflation is getting entrenched.

Draghi is attempting to steer the euro area through a weak economic recovery which is endangered by subdued pricing strength. Officials have hinted they are working on a number of possible actions for the policy meeting on June 5, including liquidity injections and interest-rate cuts.

Credit Constraints

The ECB president has said that a protracted period of low inflation might result in prompt lenders to make tighter their credit requirements and higher-than-expected debt burdens.

Since October, inflation in the euro area has been less than 1%, less than half the ECB’s target, and economies from Italy to the Netherlands shrank in the 1st quarter.

Lagarde Address

Christine Lagarde, IMF Managing Director has cautioned policy makers that a new sort of instruments to strengthen financial stability, called macro prudential tools, are not verified.

Asset Purchases

It is widely expected that European Central Bank’s Governing Council will relax policy in June. Analysts forecast a simultaneous reduction in the benchmark rate as well as the deposit rate.

A worsening of the medium-term inflation would give good reason for broad-based asset purchases.