We have to aggressively fight ultra-low inflation – that was the message repeated by European Central Bank President Mario Draghi on Thursday, who said the risk of acting too late is greater than that of acting too early.
The risks of acting too late outweigh the risks of acting too early
Speaking during a conference at Germany’s central bank, the ECB head warned against a wait-and-see stance because of the oil price shock. He said letting low inflation become entrenched would erode long-term expectations and confidence in the ECB.
“If we do not surrender to low inflation – and we certainly do not – in the steady state it will return to levels consistent with our objective,” Draghi said.
“If, on the other hand, we capitulate to inexorable disinflationary forces or invoke long periods of transition for inflation to come down, we will in fact only perpetuate disinflation.”
The location was significant as the Bundesbank strongly opposes more stimulus in the form of printing money to buy government bonds, and German central bank official are not convinced that lower oil prices will lead to more deflation, reduced wage growth and lower people’s expectations of future price rises.
The ECB has raised the prospect of further stimulus as soon as March and investors have already priced in a deposit rate cut and possible adjustments to the bank’s 1.5 trillion euro quantitative easing programme.
The ECB targets inflation at just under 2.0 percent but has undershot that target for three straight years and is unlikely to return to it for years to come given low oil prices, lacklustre economic growth, weak lending and only modest wage rises in the eurozone.