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MNI (London)
--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
[TOPICS: M$E$$$,M$X$$$,MC$$$$,M$$EC$]
MNI London Bureau | +44 203-865-3812 | les.commons@marketnews.com