There was no eurozone interest rate change at the European Central Bank’s May meeting – it stays at a record low 0.25 percent – but ECB President Mario Draghi said it is ready to take action next month to boost the region’s economy if inflation remains too low.
Draghi stressed the ECB’s independence, responding to French politicians and the International Monetary Fund who want it to do more for the economy and to counter deflationary pressures.
“It is true that the recovery is proceeding, but it is proceeding at a slow pace, and it still remains fairly modest,” Draghi said.
He added: “I would say that the Governing Council is comfortable with acting next time, but before [that] we want to see the staff projections that will come out in early June.”
The IMF, France’s prime minister and others have been calling for moves to curb the growing strength of the euro.
As Dragi spoke the currency slipped, but remains near a two and a half year high against the dollar. At one stage on Thursday it was just shy of $1.40.
The ECB’s experts are not likely to come up with eurozone forecasts that are much different from the European Commission which just predicted 1.2 percent growth this year and inflation at 0.8 percent.
Inflation that low makes it harder for businesses and individuals to reduce debt.
And a strong currency can reduce economic activity by making exports more expensive and imports cheaper.
Very low inflation, or prices actually falling – deflation – can derail a recovery as people put off buying things anticipating that prices will fall in the future, which is what caused Japan’s economy to stagnate for over a decade.