ECB cuts inflation forecast as Draghi pledges low interest rates

European Central Bank President Mario Draghi said officials cut their inflation forecast for next year, and signaled that the ECB will keep rates interest low for the foreseeable future.

“We may experience a prolonged period of low inflation,” Draghi said at a news conference in Frankfurt today, echoing language he used last month after the ECB unexpectedly cut interest rates. Today, the ECB kept its main interest rates unchanged.

Draghi reiterated his commitment to keeping borrowing costs low “for an extended period of time” as policy makers debate whether they have done enough to prevent deflation and support the region’s recovery, or whether they need to embrace measures such as a negative deposit rate.

The ECB forecasts inflation at 1.1% in 2014, 0.2 percentage point lower than the previous prediction. It sees inflation at 1.3% in 2015, the first time it has made a forecast for that year.

The ECB predicts the economy will contract 0.4% this year, unchanged from the previous forecast, before expanding 1.1% in 2014 and 1.5% in 2015. In September, the ECB said the economy would grow 1% next year.

“We are monitoring developments closely and are ready to consider all available instruments” he said. “Our monetary policy stance will remain accommodative for as long as necessary.”

LTRO Hint

The euro rose to $1.3651 after trading at $1.3580 before Draghi spoke. The yield on Germany’s benchmark 10-year government bond rose around 3 basis points to 1.855%.

Draghi also said that ECB policy makers want to make sure that any future offerings of long-term cash find their way into the economy, rather than being hoarded by banks.

“We want to make sure that this operation is not going to be used for subsidizing capital formation by the banking system under these carry trade operations,” he said. In previous allotments “not much of this actually found its way into the economy.”

The Bank of England kept its benchmark rate at 0.5% in London today and left its asset-purchase target at 375 billion pounds ($613 billion).

Since the ECB cut its key rate last month, data has shown that the euro area’s economic rebound came close to a halt with growth of just 0.1% in the third quarter. The French economy unexpectedly shrank and Italy extended its longest postwar recession.

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