By Tom Fairless
FRANKFURT--European Central Bank President Mario Draghi sent a strong signal Friday that the ECB will extend its EUR1.7 trillion ($1.8 trillion) bond-purchase program next month, warning that the eurozone's weak economy remains clouded by risks and heavily reliant on the ECB's stimulus.
"We cannot yet drop our guard," Mr. Draghi said at a banking conference here. "The ECB will continue to act, as warranted, by using all the instruments available" until inflation picks up sustainably, he said.
ECB policy makers are preparing for a key meeting on Dec. 8, where they are expected to decide whether to extend their EUR80 billion a month bond-purchase program, known as quantitative easing. The program is due to end in March.
With its bond purchases, the ECB hopes to lower interest rates across the bloc's EUR10 trillion economy, thereby boosting lending, growth and inflation. But despite Frankfurt's efforts, inflation was just 0.5% last month, some way from the ECB's target of just below 2%.
Mr. Draghi's fellow ECB board member, Yves Mersch, signaled on Thursday that the central bank might be ready to extend its bond purchases, calling for a cautious approach to exiting its stimulus measures.
But Mr. Draghi may also face opposition next month. Speaking on Friday at the same conference, Jens Weidmann, president of Germany's influential Bundesbank, called for "extra care" in deploying measures such as large-scale bond purchases, and argued that eurozone inflation might rise to 1.5% by February next year.
Central banks don't "need to respond automatically whenever inflation deviates" from target, Mr. Weidmann said.
At their last rate-setting meeting on Oct. 20, ECB policy makers delayed a decision on whether to extend their bond purchases. Most officials were ready to act again, but wanted to await fresh economic data and forecasts, as well as the results of a review of the bond-purchase program, according to minutes of the meeting, published on Thursday.
Most economists expect the central bank to announce a six-month extension of the bond purchases at its next rate-setting meeting.
Mr. Draghi pointed to some encouraging signs, including a rebound in employment and a reduced dependence on exports, which makes the region less vulnerable to external shocks. But he also highlighted risks, including geopolitical uncertainty and weak bank profits.
Crucially, inflation remains far below target, and the ECB doesn't "yet see a consistent strengthening of underlying price dynamics," Mr. Draghi said.Any increase in inflation must be durable, he warned, even if the ECB decides to reduce its monetary stimulus.
On Thursday, Mr. Mersch warned of "many uncertainties...in the public sector" in Europe this year and next. France and Germany will both hold national elections next year, while Italy is preparing for a key referendum in early December, on which Prime Minister Matteo Renzi has staked his political future.
But Mr. Mersch also cautioned against excessive expectations for the ECB's upcoming meeting, and said the bank's next set of economic forecasts are likely to show inflation "very close" to 2% by 2019.
Mr. Weidmann--long an opponent of the ECB's bond purchases--didn't rule out an extension of the QE program. But he said lower oil prices are "already beginning to be washed out" of the inflation figures.
"With respect to inflation, what went down, will go up--albeit at a modest pace," Mr. Weidmann said.
Write to Tom Fairless at firstname.lastname@example.org
(END) Dow Jones Newswires
November 18, 2016 06:43 ET (11:43 GMT)
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