Friday, June 15, 2012

ECB's Draghi flags euro risks, but no inflation threat

The euro zone economy faces serious risks and no inflation threat, European Central Bank President Mario Draghi said today in comments that heightened expectations the ECB could cut interest rates or take other policy action soon.

Draghi also said the ECB stood ready to provide further liquidity to solvent banks, stressing that its provision of ultra-cheap 3-year funds, or LTROs, late in 2011 and early this year had averted a major credit crunch.

"There are serious downside risks here," Draghi told the annual ECB Watchers conference in Frankfurt. "This risk has to do mostly with the heightened uncertainty."

Financial markets are looking to the ECB to take the fast and decisive action the euro zone's governments have been unable to muster to tackle the bloc's crisis, which risks spiralling to a new intensity after knife-edge Greek elections on Sunday.

There had been a string of negative data since the May 24 cut-off period for the ECB's latest staff projections, which pointed to the economic situation stabilising, Draghi said.

His comments came just days after other ECB policymakers said the central bank might be open to cutting interest rates.

Draghi said the Eurosystem of euro zone central banks would "continue to supply liquidity to solvent banks where needed."

Draghi said: "The ECB has the crucial role of providing liquidity to sound bank counterparties in return for adequate collateral. This is what we have done throughout the crisis, faithful to our mandate of maintaining price stability over the medium term - and this is what we will continue to do."

The European Central Bank's chief kept the onus on politicians to stop the crisis spiralling, saying: "We have reached a contingency where political choices have become predominant over monetary instruments that we can use in the near future."

He spoke after other central banks from major economies said they stood ready to take steps, including coordinated action, to stabilise markets as world economies prepare for a possible financial storm or public panic after the Greek vote.

Draghi added said inflation expectations were well anchored and "there is no inflation risk in any euro area country."

ECB policymaker Ewald Nowotny said today the bank has the ability to cut interest rates if the euro zone economy continues to deteriorate and could even slash the rate that controls money market rates to zero.