Mr. Draghi’s appearance after the first meeting of the year was marked by two messages: firstly, prudence after the frenzied joy of the first days in the markets, and secondly, determination so as to act whether there is a worsening of the inflation expectations on the medium-term or a narrowing in the monetary markets.
Based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged. Incoming information and analysis have continued to confirm our previous assessment. Underlying price pressures in the euro area are expected to remain subdued over the medium term. In keeping with this picture, monetary and credit dynamics remain subdued.
At the same time, inflation expectations for the euro area over the medium to long term are firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2%. Such a constellation continues to suggest that we may experience a prolonged period of low inflation, to be followed by a gradual upward movement towards inflation rates below, but close to, 2% later on. Against this background, the Governing Council strongly emphasises that it will maintain an accommodative stance of monetary policy for as long as necessary, which will assist the gradual economic recovery in the euro area.
Accordingly, we firmly reiterate our forward guidance that we continue to expect the key ECB interest rates to remain at present or lower levels for an extended period of time. As previously stated, this expectation is based on an overall subdued outlook for inflation extending into the medium term, given the broad-based weakness of the economy and subdued monetary dynamics.
With regard to money market conditions and their potential impact on our monetary policy stance, we are monitoring developments closely and are ready to consider all available instruments. Overall, we remain determined to maintain the high degree of monetary accommodation and to take further decisive action if required.
The Spanish Stock Exchange rose by 5% in four days and the public debt started 2014 with several records: the 2-year interest went below 1% for the first time, the 5-year bonds recorded historical lows since the creation of the euro, and the 10-year yield fell to pre-crisis levels.
The good performance of the European economy, with Spain and Ireland leading the way, doesn’t mean that the crisis is over. “It is premature to cry victory about the Eurozone’s recovery,” insisted Mr. Draghi. Not only “due to the weak growth” but also “to the unacceptable unemployment rates” in countries such as Greece or Spain.
The other great risk is the ghost of deflation. Some experts claimed that the ECB should have taken action by now, especially when facing a disturbing low inflation in the Eurozone. Prices keep on falling month after month, and now they are at 0.8%, their lowest level since the creation of the common currency. But the central bank’s mandate requires maintaining the inflation expectations of the medium-term near the 2%.
Mr. Draghi acknowledged that “there will be an extended period of reduced inflation,” followed by an upward but gradual movement in prices.” However, if expectations get worse, he will use all available instruments in order to maintain prices stability. And, believe me, there are quite a lot.