FRANKFURT (MNI) – The European Central Bank’s monetary policy is
geared towards ensuring price stability, whether that means guarding
against inflation or deflation, European Central Bank President Mario
Draghi said on Thursday.

“The ECB’s monetary policy is constantly guided by the goal of
maintaining price stability in the euro area over the medium term. And
when I say this, I mean price stability in either direction,” Draghi
said told the European Parliament.

“Downside risks to the economic outlook have increased. The weaker
degree of activity is moderating price, cost and wage pressures. It is
in this context that the ECB decided to reduce its key interest rates by
25 basis points in early November 2011,” Draghi told the European
Parliament.

Draghi stressed that he is in the ECB’s blackout period, with the
next monetary policy meeting of the Governing Council one week away, and
that none of his comments should be interpreted as a signal for future
monetary policy. Nevertheless, his comments are likely to feed market
expectations of further interest rate cuts in the near-term.

The market’s reaction certainly suggests such expectations. The
December Bund contract rose 40 ticks on his comments to a fresh session
high at 134.3, and euro-dollar fell from $1.3455 to a session low at
$1.3417.

Draghi also observed that “this autumn, tensions in financial
markets have intensified again with very adverse effects on financing
conditions and confidence.” He noted that the ECB is “aware of the
continuing difficulties for banks.”

There has been mounting speculation that the ECB will ease such
difficulties by introducing fixed rate, full-allocation refinancing
operations with maturities of two or even three years, and loosening the
eligibility requirements for collateral.

The ECB President also defended the central bank’s continued bond
market purchases, but he reiterated that the interventions are limited.

“Dysfunctional government bond markets in several euro area
countries hamper the single monetary policy because the way this policy
is transmitted to the real economy depends also on the conditions of the
bond markets in the various countries,” he said.

“This is the very important monetary policy reason for the ECB’s
non-standard measures. But of course, such interventions can only be
limited,” Draghi said. “Governments must — individually and
collectively — restore their credibility vis-a-vis financial markets.”

–Frankfurt bureau tel.: +49-69-720142. Email: jtreeck@marketnews.com

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