(Adds analyst, market reaction)
By Balazs Koranyi and Francesco Canepa
SINTRA, Portugal, June 27 (Reuters) - European Central Bank President Mario Draghi opened the door to tweaks in the bank’s aggressive stimulus policy on Tuesday, fuelling market expectations that the ECB will announce a reduction of stimulus as soon as September.
But any change in the bank’s stance, which includes sub-zero rates and massive bond purchases, should be gradual as “considerable” monetary support is still needed and the rebound in inflation will also depend on favourable global financing conditions.
“A constant policy stance will become more accommodative, and the central bank can accompany the recovery by adjusting the parameters of its policy instruments – not in order to tighten the policy stance, but to keep it broadly unchanged,” Draghi told an ECB conference in Sintra, Portugal.
His comments sent the euro half a percent higher as investors took them as a signal the ECB was preparing to announce a cut in massive bond purchases as soon as September.
With its 2.3-trillion-euro asset buys running until the end of the year, the ECB will have to decide in the third quarter whether to extend or wind down the purchases, reconciling an apparent contradiction between healthy growth and weak inflation.
“Today Draghi moved his first step towards indicating that ECB monetary policy will become less accommodative in 2018,” UniCredit economic Marco Valli said. “Unless an unexpected shock materialises, a formal tapering announcement is likely to come at the ECB monetary policy meeting scheduled on 7 September.”
But Draghi also played down expectations for a speedy withdrawal of stimulus, suggesting that any normalisation will be drawn out.
“There are strong grounds for prudence in the adjustment of monetary policy parameters, even when accompanying the recovery,” he said. “Any adjustments to our stance have to be made gradually, and only when the improving dynamics that justify them appear sufficiently secure.”
Growth accelerating and holding firmly above trends argues for a reduction in stimulus but persistent labour market slack and commodity price shocks bolster arguments for restraint.
Inflation has undershot the ECB’s target of almost 2 percent for over four years but Draghi also hinted at a willingness to look through some of the factors holding down price growth.
“While there are still factors that are weighing on the path of inflation, at present they are mainly temporary factors that typically the central bank can look through,” he said.
“All the signs now point to a strengthening and broadening recovery in the euro area. Deflationary forces have been replaced by reflationary ones.” (Reporting by Francesco Canepa and Balazs Koranyi; Editing by Mark Heinrich)