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Draghi Says ECB Credibility Hinges on Meeting Inflation Goal

  • ECB President says critics ignore risks of doing nothing
  • While core inflation not the ECB goal, it leads headline gauge

Mario Draghi hit back at critics of his policies, saying the European Central Bank must fulfill its inflation mandate in order to maintain its credibility.

“Meeting our objective is about credibility,” the ECB president said in a speech near Frankfurt on Monday. “If a central bank sets an objective, it can’t just move the goalposts when it misses it.”

ECB policy makers have less than seven weeks until a March 10 meeting when they’ll decide whether their 1.5 trillion-euro ($1.6 trillion) bond-purchase plan and negative interest rates are enough to meet their inflation goal of just under 2 percent. With slumping oil costs weighing on consumer prices that are already close to stagnating, Draghi is trying to convince investors that the central bank remains willing to act if needed.

“With inflation already low for some time, we saw a danger that a continued period of low inflation –- even if oil-driven -– might destabilize inflation expectations and become persistent,” Draghi said referring to the ECB stimulus package announced in December 2015. “That risk was heightened by the fact that ‘core’ inflation, which strips out energy and food, was also low. Core inflation is not our objective, but it tends to lead headline inflation over the medium-term.”

The euro was up 0.1 percent at 1.0858 at 9:24 a.m. in Frankfurt.

Consumer Prices

Inflation in the 19-member euro area hasn’t touched its goal since early 2013. While a report due Friday will show the rate picked up to 0.4 percent in January from 0.2 percent the previous month, according to a Bloomberg survey of economists, Draghi has said it could turn negative in coming months. In December, core inflation stood at 0.9 percent.

Worryingly for the central bank, crude costs have become increasingly correlated with inflation expectations.

The ECB’s December staff forecasts predicted that inflation would average 1 percent this year and 1.6 percent in 2017. Governing Council member Klaas Knot said on Sunday that this year’s projection can be “binned because of the oil-price drop.”

Draghi also responded to critics the ECB ultra-easy policy, saying that while their concerns contain “a grain of truth,” highlighting risks and signaling potential side effects, they also miss the larger picture.

“What I never hear them discuss is the risks of doing nothing. What would that mean for our price stability mandate, and therefore for growth and jobs, and eventually, for the future of our monetary union,” he said. “Those are, to my mind, the real risks we have to be concerned about. And the path our monetary policy is taking is, in that sense, the path of risk reduction.”

Determination, Willingness, Capacity

Draghi said at a press conference last week that the ECB has the instruments and the “determination, and the willingness and the capacity” to fight to uphold its price-stability mandate. The Governing Council didn’t want to discuss specific instruments and the ECB’s technical committees will study options, he said.

Under the current program, the ECB buys 60 billion euros a month of government and agency debt, covered bonds and asset-backed securities. Policy makers agreed last month to extend the range to include the regional debt of euro-area member states.

Economists at JPMorgan Chase & Co. and Royal Bank of Scotland Group Plc changed their forecasts for more easing to March from June after last week’s press conference. Markets rallied, with the Standard & Poor’s 500 Index posting its strongest two-day rally in three months.

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