Draghi Pledges ECB Will Prevent ‘Harmful’ Second-Round Effects

  • ECB is ready to act and use all instruments within mandate
  • Executive Board member Praet calls for reforms in euro area

The European Central Bank will take all the necessary steps to prevent subdued price gains from spilling over into wages, President Mario Draghi said on Friday.

“In the current context of inflation rates still being very low, the ECB will continue to ensure that harmful second-round effects do not become entrenched in price and wage-setting,” Draghi said in a statement to the International Monetary and Financial Committee in Washington that was posted on the central bank’s website. “If warranted, we will act by using all the instruments available within our mandate.”

The last time Draghi used similar language in an official statement to express concern about spillovers from stubbornly low inflation was at a June 2 press conference. Since then, the outlook for price growth in the 19-nation euro area hasn’t changed materially, and an account of the Sept. 7-8 policy meeting expressed concern among Governing Council members that underlying price pressures continued to lack a “convincing” upward trend.

Executive Board member Peter Praet said at a separate event in Washington that ECB monetary policy “cannot be the only game in town for too long,” and euro-area governments should speed up reforms to support economic recovery in the euro area and foster long-term growth.

Secular Stagnation

“The ECB has taken determined and unprecedented action to maintain price stability and to prevent the euro area from settling into a bad equilibrium,” said Praet, who also is the institution’s chief economist. “Member states collectively control the destiny of the euro area and through well-aligned policies can make sure that ‘secular stagnation’ will not take hold in the euro area.”

The ECB has missed its inflation goal of just below 2 percent for more than three years and its own projections signal it will continue to do so through late 2018. After cutting its deposit rate below zero and committing to 1.7 trillion euros ($1.9 trillion) of asset purchases through March, policy makers are now considering whether to extend the program.

While the Governing Council hasn’t formally discussed when and how to end quantitative easing, people familiar with the discussions told Bloomberg that buying will eventually be tapered instead of stopped suddenly.

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