Draghi: ECB Sees 'Prolonged Period Of Low Inflation'

(RTTNews) - Eurozone interest rates were reduced on Thursday as the economy is likely to face a prolonged period of low inflation, but no deflation, the European Central Bank President Mario Draghi said on Thursday.

Earlier today, the ECB sprung a surprise by cutting the key interest rate to a record low 0.25 percent, amid intense market speculation for such a move, given the combination of low inflation, record unemployment and a stronger currency.

"We may experience a prolonged period of low inflation, to be followed by a gradual upward movement towards inflation rates below, but close to, 2% later on," Draghi said in his introductory statement during the customary post-decision press conference in Frankfurt.

"Accordingly, our monetary policy stance will remain accommodative for as long as necessary."

Underlying price pressures and credit dynamics are also seen subdued, while inflation expectations continue to be firmly anchored in line with the ECB's inflation target, he said.

The latest quarter-point reduction in the refi rate and the marginal lending facility rate were in line with the ECB's forward guidance, first announced in July, the central bank chief said.

"The Governing Council reviewed the guidance today after the rate cut and confirmed that it continues to expect the key ECB interest rates to remain at present or lower levels for an extended period of time," Draghi said.

Saying that the bank is ready to consider all available instruments, Draghi announced that the ECB will continue conducting the main refinancing operations (MROs) as fixed rate tender procedures with full allotment for as long as necessary.

The bank also decided to conduct the three-month longer-term refinancing operations (LTROs), to be allotted until the end of the second quarter of 2015, as fixed rate tender procedures with full allotment.

Some economists had expected the central bank to launch more LTROs this month. While responding to questions from reporters, Draghi said policymakers did not discuss LTROs in a significant way today.

He also said that the ECB continued to maintain a downward bias on interest rates and it has not reached the lower bound on the same. Further, he said it will be made clear in the December meeting what the central bank meant by "prolonged period", when the ECB staff releases its latest macroeconomic projections.

Regarding the Governing Council discussion today, Draghi said most members felt the existing data was sufficient to cut rates now. However, some members chose to wait for more data. Further, policymakers also discussed the already-zero deposit rate, he said, adding that the bank stood ready to move it when needed.

The ECB expects output to continue to recover at a slow pace, mainly due to a gradual improvement in both domestic and foreign demand. The bank also sees the financial market improvements feeding through to the real economy, albeit gradually, and the lower energy price inflation boosting real incomes.

However, unemployment in the euro area remains high, and the necessary balance sheet adjustments in the public and private sectors will continue to weigh on economic activity, Draghi said. Risks to the economic outlook continue to be on the downside, while those to the inflation outlook are broadly balanced, he added.

The central bank does not see deflation in the euro area, but just a protracted period of low inflation, the ECB president said.

Drawing attention to the significant progress made in improving the funding situation in banks, Draghi called for a reduction in the fragmentation of euro area credit markets and further strengthening of the resilience of banks to ensure an adequate transmission of monetary policy.

"The ECB's comprehensive assessment before it adopts its supervisory role under the single supervisory mechanism will further support this confidence-building process," he said. "Further decisive steps to establish a banking union will help to restore confidence in the financial system."

Draghi also urged euro area governments not to discard their deficit-reduction measures and sustain fiscal adjustment over the medium term.