MNI POLICY: ECB Ready To Use "All Instruments", Draghi Says

By Luke Heighton

     FRANKFURT (MNI) - The European Central Bank stands ready to use all policy

tools at its disposal should the economy deteriorate, President Mario Draghi

said, although he added that the possibility of tiering the deposit rate to

offset the effects of negative rates on bank profitability wasn't discussed at

Wednesday's monetary policy meeting.

     "We're ready to use all instruments. All instruments," Draghi told a news

conference. But he added that in order to reap the full benefits from monetary

policy measures, "other policy areas must contribute more decisively to raising

the longer-term growth potential and reducing vulnerabilities. All countries

should reinforce their efforts to achieve a more growth-friendly composition of

public finances."

     In its statement following the meeting, at which it decided to keep key

rates unchanged until at least through the end of 2019 , the ECB said it would

"consider whether the preservation of the favourable implications of negative

interest rates for the economy requires the mitigation of their possible side

effects, if any, on bank intermediation."

     But Draghi said neither the "merits or the cons" of mitigating their

effects or specific measures to counter their side-effects, had been discussed.

     Neither were precise terms of upcoming TLTRO-III loans to banks discussed,

Draghi said, although these would be communicated "at one of our forthcoming

meetings." Wednesday's gathering in Frankfurt was "one where the main goal was

to reassert the readiness to act if the contingency warranted, so it was not an

operational meeting."

     Draghi confirmed that slower growth momentum is expected to extend into the

current year. Despite "signs that some of the idiosyncratic domestic factors

dampening growth are fading," global headwinds persist, he said, and risks

remain tilted to the downside.

     Draghi moved to allay market concerns over a yet another drop in headline

inflation, saying he expected it to "bottom" in September - offset by employment

gains, rising wages and high levels of capacity utilisation that "continue to

underpin the resilience of the domestic economy and gradually rising inflation

pressures."

     "We remain fully committed to return inflation to 2% without any undue

delay," he added. "Our inflation aim does not imply a ceiling at 2%. Inflation

can deviate from our inflation objective as long as the sustainable path

converges to our medium-term aim."

--MNI Frankfurt Bureau; +49-69-720-146; email: luke.heighton@marketnews.com

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

[TOPICS: M$X$$$,MT$$$$,M$$EC$]