Draghi Says Inflation to Exceed 2% in 2012

European Central Bank President Mario Draghi said inflation will probably breach the bank’s 2 percent limit this year and signaled the worst of the sovereign debt crisis may be over even as the economy stalls.

“Inflation rates are now likely to stay above 2 percent in 2012, with upside risks prevailing,” Draghi said in Frankfurt today after the ECB kept its benchmark interest rate at a record-low 1 percent. While risks to the economic outlook remain on the downside, “the risk environment has improved enormously,” he said. “We see many signs of returning confidence in the euro.”

Draghi’s comments are “certainly hawkish,” said James Nixon, an economist at Societe Generale SA in London. “Basically, the ECB is confident that the crisis has been averted and the focus is now back on inflation.”

The debt crisis is damping growth across the euro region and making banks reluctant to lend. Having flooded the banking sector with more than 1 trillion euros ($1.31 trillion) to avert a credit crunch, the ECB is now confronted with an oil-price increase that’s propping up inflation at a time when at least six of the 17 euro nations are in recession.

The euro rose on Draghi’s inflation comments before retreating to trade little changed at $1.3235 as of 3:30 p.m. in Frankfurt.

ECB Projections

Draghi said the ECB’s latest economic projections show inflation averaging 2.4 percent in 2012, up from a December forecast of 2 percent. They show the economy may contract 0.1 percent, down from the previous forecast for 0.3 percent growth.

Latest data “confirm signs of a stabilization in the euro- area economy,” though the outlook “is still subject to downside risks,” Draghi said. “Looking ahead, we expect the euro-area economy to recover gradually in the course of this year.”

Growth will accelerate to 1.1 percent in 2013 and inflation will slow to 1.6 percent, according to the ECB’s projections.

“Risks to projected HICP inflation rates in the coming years are seen to be still broadly balanced, with upside risks in the near term mainly stemming from higher-than-expected oil prices and indirect tax increases,” Draghi said. “However, downside risks continue to exist owing to weaker than expected developments in economic activity.”

With widening economic divergences making it harder for the ECB to set a common monetary policy, its response may be to do nothing. It will keep rates on hold at least through the third quarter of 2013, the median forecast in a Bloomberg survey shows.

Policy makers didn’t discuss changing interest rates at their meeting today, Draghi said.

“We expect the ECB to keep interest rates on hold for the foreseeable future,” said Nick Kounis, head of macro research at ABN Amro NV in Amsterdam. The ECB is signaling that “it has done enough,” he said.

To contact the reporters on this story: Matthew Brockett in Frankfurt at mbrockett1@bloomberg.net; Gabi Thesing in London at gthesing@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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European Central Bank President Mario Draghi

Hannelore Foerster/Bloomberg

Mario Draghi, president of the European Central Bank (ECB), adjusts his spectacles during todays news conference.

Mario Draghi, president of the European Central Bank (ECB), adjusts his spectacles during todays news conference. Photographer: Hannelore Foerster/Bloomberg

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March 8 (Bloomberg) -- European Central Bank President Mario Draghi speaks at his monthly news conference in Frankfurt about the decision to keep interest rates on hold at 1 percent and the outlook for the region's economy. (This is Draghi's statement only. Source: European Central Bank)

Enlarge image

European Central Bank President Mario Draghi

Hannelore Foerster/Bloomberg

European Central Bank President Mario Draghi unveils the new projections at a 2:30 p.m. briefing.

European Central Bank President Mario Draghi unveils the new projections at a 2:30 p.m. briefing. Photographer: Hannelore Foerster/Bloomberg