ECB's Draghi points to increased risks ahead of March meeting

FRANKFURT (Reuters) - Euro zone growth and inflation prospects have weakened and the European Central Bank’s March policy decisions will need to take into account the deteriorating outlook, ECB President Mario Draghi said on Tuesday.

European Central Bank (ECB) President Mario Draghi arrives at the EU council headquarters for the second day of a European Union leaders summit addressing the talks about the so-called Brexit and the migrants crisis in Brussels, Belgium, February 19, 2016. REUTERS/Eric Vidal

Euro zone inflation dipped into negative territory in February, missing already low expectations, virtually ensuring that the ECB will unveil a fresh easing package when it reviews policy on March 10.

“The review has to be seen against the background of increased downside risks to the earlier outlook amid heightened

uncertainty about emerging market economies’ growth prospects, volatility in the financial and commodity markets, and geopolitical risks,” Draghi said.

“In this environment, euro area inflation dynamics continue to be weaker than expected,” Draghi told a member of the European Parliament in a letter dated March 1.

Sentiment and PMI data have all surprised on the downside recently while core inflation, which strips out food and energy prices, also dipped, suggesting that low oil prices are feeding into the price of other goods and services, creating a so-called second round effect that could entrench low inflation.

Draghi said the March meeting would also include a more in-depth analysis of the potential second-round effects of the inflation fall and said the ECB would not hesitate to act, if needed.

“The Governing Council has a variety of instruments at its disposal to respond, if warranted, and there are no limits to how far we are willing to deploy our instruments within our mandate to achieve our objective of inflation rates below, but close to 2 percent over the medium term,” Draghi said.

The ECB is expected to cut its deposit rate by 10 basis points to -0.4 percent in March but markets are split over what other steps are likely.

Some predict an increase in the 60 billion euro per month asset buys, others see just technical changes to quantitative easing and some expect the bank to unveil a multi-tier deposit rate system.

Reporting by Balazs Koranyi; editing by John O’Donnell and Richard Balmforth