Draghi says inflation risks prevail as economy stabilizes

ECB President Mario Draghi (Source: Bloomberg ECB President Mario Draghi (Source: Bloomberg

April 4 (Bloomberg) -- European Central Bank President Mario Draghi said policy makers are prepared to act against inflation threats if needed, while assuring investors that the ECB doesn’t plan to withdraw emergency stimulus any time soon.

“All the necessary tools are available to address upside risks to price stability in a firm and timely manner,” Draghi told reporters in Frankfurt after the ECB held its benchmark rate at a record low of 1% today. At the same time, it’s premature to talk about the ECB’s exit strategy, Draghi said, adding that the economic outlook remains subject to downside risks and inflation will remain contained in the medium term.

The ECB is balancing the threat of inflation in Germany, Europe’s largest economy, against the need to fight the sovereign debt crisis. While nations from Greece to Spain are battling recessions and record unemployment, workers in Germany are winning some of the biggest pay increases in 20 years.

“We will pay particular attention to any signs of pass- through from energy prices to wages,” Draghi said. “However, looking ahead, in an environment of modest growth in the euro area and well-anchored long-term inflation expectations, underlying price pressures should remain limited.”

The ECB predicts higher energy costs will keep euro-area inflation above its 2% limit this year before slowing in 2013. The rate was 2.6% in March.

The euro and German bunds were little changed after Draghi’s comments. The single currency traded at $1.3136 at 3:48 p.m. in Frankfurt and the yield on Germany’s 10-year bund was at 1.80 percent.

Inflation Breach

Draghi’s inflation warning comes just months after the ECB cut borrowing costs and pumped more than 1 trillion euros ($1.3 trillion) of cheap cash into Europe’s banking system to stem the debt crisis.

Asked about today’s pledge to act on price risks in a “firm and timely manner” -- a new comment in the policy statement -- Draghi said: “I don’t think I’m stepping up my rhetoric on inflation.”

He declined to comment on recent wage settlements in Germany, where 2 million public service workers are set for a 6.3% raise over two years, according to the Ver.di union. It would be the biggest increase negotiated by the union since 1992. IG Metall, Europe’s biggest labor union with about 3.6 million workers, is demanding 6.5% more pay.

ECB Exit

Bundesbank President Jens Weidmann was one of the first ECB policy makers to start talking about an eventual exit from stimulus measures, saying the emergency lending to banks entails significant risks.

Draghi told Germany’s mass tabloid Bild newspaper last month that he shares Weidmann’s concerns and “all members of the Governing Council have taken to heart Germany’s stability culture.”

With Spain struggling to attract demand at a bond auction today and Prime Minister Mariano Rajoy speaking of “extreme” difficulties, Draghi said that “any exit strategy talk for the time being is premature.”

Spain’s 10-year borrowing costs are approaching levels seen before the ECB’s first round of three-year loans in December, with the yield rising to 5.60 percent. In today’s auction, the average yield on bonds due in October 2016 rose to 4.319% from 3.376% last month.

The 17-nation euro economy will shrink 0.3% this year, according to the European Commission, which projects contractions in Italy, Spain, Belgium, Greece, Cyprus, the Netherlands, Portugal and Slovenia. By contrast, Germany’s economy is forecast to expand 0.6 percent.

Bloomberg News

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