European Central Bank (ECB) President Mario Draghi warned Monday that a “pernicious negative spiral” of low inflation and weak lending could derail the eurozone’s fledgling recovery, Financial Times reported.
In comments that boosted hopes for a package of rate cuts and credit easing measures at a crucial policy vote next week, Draghi was quoted as saying in Portugal that credit constraints were “putting a break on the recovery in stressed countries, which adds to disinflationary pressures”. He stressed that lending conditions were particularly tight for smaller companies in peripheral countries.
The comments, which came ahead of an ECB governing council vote next Thursday, suggest the bank will couple rate cuts with measures to boost lending, the report said.
Draghi indicated that outright bond buying, commonly referred to as quantitative easing, remains an option. However, he suggested the outlook would have to worsen before the central bank acted.
“To the extent that developments in the exchange rate, money or capital markets result in an unwarranted tightening of monetary and financial conditions, this would require adjustment of our conventional instruments,” he said.
“At the other end of the spectrum would be a too prolonged downward departure of inflation and/ or inflation expectations from our projected baseline scenario . . . This would call for a more expansionary stance, which would be the context for a broad-based asset purchase program.”
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