Draghi: ECB aware of risks from persistently low inflation

SINTRA Portugal Tue May 27, 2014 11:45am EDT

European Central Bank (ECB) President Mario Draghi addresses a news conference following the ECB Governing Council meeting in Brussels May 8, 2014.  REUTERS/Francois Lenoir

European Central Bank (ECB) President Mario Draghi addresses a news conference following the ECB Governing Council meeting in Brussels May 8, 2014.

Credit: Reuters/Francois Lenoir

SINTRA Portugal (Reuters) - European Central Bank President Mario Draghi said on Tuesday the bank was aware of the risks from prices remaining too low for too long and the ECB was equipped to get inflation back to its target again.

Speaking at the ECB's inaugural Forum on Central Banking, Draghi said the ECB had the tools it needed to get euro zone inflation back to its target of below, but close to 2 percent. Inflation was 0.7 percent in April.

Draghi said price adjustments in certain euro zone countries were at risk of slowing and then getting entrenched.

"We are aware of the risks of a too prolonged low inflation period," Draghi said.

Speaking at the same conference on Monday, Draghi said the ECB must be "particularly watchful" for any negative price spiral in the euro zone, adding that the bank was not resigned to inflation being too low for too long.

JOINT PAPER

The ECB is especially concerned about difficult funding conditions for small- and medium-sized enterprises (SMEs), which Draghi said account for about 80 percent of employment in the euro zone.

"Impairment of lending to SMEs is an impairment of the transmission channels of our monetary policy, so in a sense it is an impairment in our capacity and ability achieve our objective of price stability," Draghi said.

One way to unblock lending to these companies would be to revive the securitised loan market, which collapsed after the financial crisis. The ECB plans to publish a joint paper with the Bank of England on the issue.

Adjusting the regulatory treatment of such securities was key, Draghi said. Regulatory standards have tightened significantly for these assets which have, among other things, been blamed for causing the financial crisis.

But the ECB says the new regulations make no distinction between complex asset backed securities and more simply structured ABS, whose default rate is much lower and which would mainly be used for SME funding.

Draghi said the ECB would push to revise the standards.

"What we plan to do is to endorse, enhance a revisitation of the regulatory treatment and to this extent I believe the next meeting of the Financial Stability Board will take up this and the Basel Committee will discuss this in the fall."

(Reporting by Eva Taylor; Editing by Paul Carrel/Ruth Pitchford)

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