MNI: ECB Confirms Cautious Approach to Any Policy Adjustment

--Inflation Converging Towards Medium Term Aim, But Risks Remain

By Christian Vits

     FRANKFURT (MNI) - European Central Bank policy makers on Wednesday

reassured over their cautious stance on a further adjustment of monetary policy,

underlining risks to growth and inflation and the lack of underlying inflation

pressures despite robust economic growth.

     "We currently see inflation converging towards our aim over the medium

term, and we are more confident than in the past this convergence will come to

pass," ECB President Mario Draghi told the annual 'The ECB and its Watchers'

conference in Frankfurt.

     "But we still need to see further evidence that inflation dynamics are

moving in the right direction. So monetary policy will remain patient,

persistent and prudent," Draghi underlined.

     --DOVISH SIGNALS

     While the ECB last week surprisingly dropped its pledge to increase the

asset purchase programme (APP) in terms of size and/or duration if the outlook

becomes less favourable, the bank remains keen to send dovish signals to keep

financial market reactions on policy adjustments to a minimum.

     The ECB will conduct monthly asset purchases of E30 billion until September

-- and some observers expect a possible extension until the end of the year,

although at a slower pace.

     Vice President Vitor Constancio underlined in another speech to the

conference that the Eurozone economy still needs generous support from monetary

policy due to current low inflationary pressures. 

     "Our price stability mandate continues to require maintaining a very

accommodative monetary policy stance which has been decisive for the economic

recovery and gradual normalisation of inflation," he said.

     At the same time, "contrary to some alarmist views, euro area asset prices

currently do not point to signs of a general overvaluation in the euro area and

certainly not of credit-fuelled bubbles."

     Draghi stressed that the economy has been growing consistently above

current estimates of potential growth and more than previously expected but at

the same time explicitly noted two risks for the growth and inflation outlook.

     --U.S. MEASURES

     "The first risk relates to the global environment, and in particular

possible spill overs of the new trade measures announced by the US

administration," Draghi said.

     First-round effects on the euro area are likely to be small, even if there

is symmetric retaliation from US trading partners, according to Draghi.

     "But there are potential second-round effects that could have much more

serious consequences. These include the risk of retaliation across other goods

and an escalation of trade tensions; and the potential for negative confidence

effects, which would weigh on business investment in particular," he added.

     The second risk relates to developments in foreign exchange markets and

wider financial markets, Draghi noted. The euro has gained more than 5% against

the Dollar during the past three months.

     The euros strength cannot be explained solely by the economic expansion,

Draghi said. "This might weigh on inflation down the line as it does not fully

arise from stronger euro area fundamentals. This is a development we need to

monitor closely," he added.

     --WORDING EVOLUTION

     Chief Economist Peter Praet highlighted that the ECB's wording has to be

changed in the foreseeable future.

     "With the passage of time, the indication that policy rates will remain at

their present levels well past the end of net asset purchases will gradually

cease to provide sufficient guidance about the likely evolution of the monetary

policy stance," he said.

     Therefore, the bank's forward guidance on the path of policy rates "will

have to be further specified and calibrated as appropriate for inflation," Praet

added.

--MNI Frankfurt Bureau; +49 69 97782671; email: christian.vits@marketnews.com

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