Asset purchase may be necessary to drive up inflation - Draghi

Mario Draghi said the European Central Bank must drive inflation higher quickly, and will broaden its asset-purchase program if needed to achieve that.

“We will do what we must to raise inflation and inflation expectations as fast as possible, as our price-stability mandate requires,” the ECB president said at a conference in Frankfurt today.

Shorter-term inflation expectations “have been declining to levels that I would deem excessively low,” he said.

Any new action would follow a flurry of activity since June that has included interest-rate cuts, long-term bank loans, and covered-bond purchases, with buying of asset-backed securities due to start as soon as today.

Mr Draghi has declined to rule out buying government bonds and said after this month’s monetary policy meeting that staff have been told to study further measures to boost the economy if needed.

The euro dropped, stocks gained and bonds in the euro area’s periphery rallied on Mr Draghi’s comments. The single currency was down 0.7 per cent at $1.2448 at 11:45 this morning.

The Stoxx Europe 600 Index climbed 1 per cent to 341.8.

“There is a combination of policies that will work to bring growth and inflation back on a sound path,” Mr Draghi said.

“If on its current trajectory our policy is not effective enough to achieve this, or further risks to the inflation outlook materialise, we would step up the pressure and broaden even more the channels through which we intervene, by altering accordingly the size, pace and composition of our purchases.”

The ECB is trying to boost the size of its balance sheet to early 2012 levels, signalling an increase of as much as €1 trillion ($1.25 trillion) to help revive the euro-area economy.

Gross domestic product expanded just 0.2 per cent last quarter and inflation is running at 0.4 per cent, well below the ECB's goal of just under 2 per cent. Other measures may not win unanimous approval in the ECB's Governing Council.

One of its members Klaas Knot said this week that he's "sceptical" about quantitative easing.

Bundesbank President Jens Weidmann has argued that large-scale sovereign-debt purchases muddy the line between fiscal and monetary. While Mr Weidmann didn't address the question of asset purchases when he spoke at the Frankfurt conference two hours after Draghi - instead focusing on banking regulation - he did point to the limits of monetary policy.

“More than just favourable refinancing conditions will be needed to stimulate credit growth,” he said.

The euro area needs “structural reforms which bolster competitiveness and boost economies’ growth potential. A prosperous economy needs healthy banks, but the opposite is just as true: healthy banks need a prosperous economy.”

-Bloomberg