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ECB may buy assets if inflation weakens

Thursday, April 24 11:20:05

The European Central Bank could embark on a broad-based asset buying plan if the euro zone inflation outlook worsens, ECB President Mario Draghi said, adding that a rise in the euro could also trigger policy action.

While stressing that the ECB sees inflation remaining low for a prolonged period before rising again, Draghi set out three "contingencies" for the ECB to act. He also said a rise in the euro could - all else being equal - prompt the ECB to act.

Draghi said "the exchange rate is an increasingly important factor in our assessment of the outlook for price stability."

The euro fell to $1.3815 after the release of Draghi's comments from around $1.3835 beforehand.

A worsening of the medium-term outlook for inflation "would be the context for a more broad-based asset purchase programme", Draghi said in the text of a speech for delivery in Amsterdam.

The comments were the clearest indication yet from Draghi that the ECB would be prepared to embark on a full-blown quantitative easing (QE) programme - printing money to buy assets - if the inflation outlook were to deteriorate further.

Euro zone inflation is running at 0.5 percent - far below the ECB's target of just below 2 percent over the medium-term - although Draghi again said the bank sees it remaining low for a prolonged period before gradually rising back to 2 percent.

Draghi also said a rise in the euro's exchange rate would, all other things being equal, imply a tightening of monetary conditions with a downward impact on inflation and so pose a potential a threat to the currency bloc's economic recovery.

"If so, this would call for policy action," he said.

Under the scenario of an undue tightening in the ECB's policy stance that could arise from bond market tensions, Draghi said the central bank could respond with a variety of conventional measures.

This included "a further lowering of the interest rate corridor, including a negative deposit rate", and a further extension of the fixed-rate, full allotment procedure - whereby the ECB lends banks as much money as they want at a fixed rate - beyond the existing timeframe running until July 2015.

"Finally, if necessary, the measures could include new liquidity injections via our liquidity operations, including longer-term fixed-rate operations," he said.

Should the ECB's policy transmission be further impaired, the central bank could respond with "a longer-term refinancing operation targeted towards encouraging bank lending or an ABS purchase programme".

(Reuters)