By Peter Koh

BARCELONA (MNI) – European Central Bank President Mario Draghi left
the door open for the ECB to act if evidence continues to mount that the
Eurozone economy is weakening further, but he gave no reason to think
that an easing move should be expected anytime soon.

Although he reiterated the central bank’s assessment that there
were signs of a “stabilization of economic activity at a low level” and
that “economic activity is expected to recover gradually over the course
of the year,” he also noted that recent survey data “highlight
prevailing uncertainty.”

While sticking to the ECB’s current outlook, Draghi hinted that it
could be revised in a more pessimistic direction should the weak data
continue.

“We basically think that the indications we had in April are not
enough for us to change our baseline scenario that calls for a recovery
towards the end of the year,” he said, referring to April’s
weaker-than-expected PMIs and other indicators. “We will be clearer in
our assessment next month when we have more data,” he added. The ECB’s
new staff forecasts are scheduled to be released after the bank’s
monetary policy meeting on June 6.

Draghi’s language on inflation today also had a slightly more
Dovish accent than in last month’s press conference. He described the
risks to the outlook for inflation as “broadly balanced” between upside
risks emanating from commodities and indirect taxes and downside risks
from weaker-than-expected economic activity, but he did not repeat the
ECB’s assessment of last month that short-term inflation risks were on
the upside. Instead he said, “underlying price pressures should stay
limited.”

The ECB President also revealed that while the bank’s Governing
Council had “discussed quite extensively the monetary policy stance,” no
“specific move on interest rates” was part of that discussion.

The ECB’s conclusion that its monetary policy is “accommodative,”
combined with its observations that “both nominal interest rates are
low” and “real short-term interest rates are negative in all Eurozone
countries,” and that inflation is projected to remain above 2% this
year, suggests that a rate cut is still some time away.

Draghi argued that the ECB’s cheap three-year loans to the
financial sector had successfully averted a major credit crunch, and
that although the cash has started to ease lending constraints for
banks, it will still take time for their full positive impact to unfold.

It is therefore “too early” to say that the effects of the
Longer-Term Refinancing Operations have waned as some have suggested,
the ECB chief said.

While reiterating that all the ECB’s non-standard measures were
temporary and limited, he also repeated that “any exit strategy remains
premature.”

Draghi returned to the “growth compact” theme he had introduced
last week in comments to members of the European Parliament. “We have to
put growth back at the centre of the agenda,” he said, urging
governments to persevere with structural reforms and fiscal
consolidation — a position he said was not contradictory because
sustainable growth requires sound public finances.

–Brussels newsroom: +324-9522-8374; pkoh@marketnews.com

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