Sintra, Portugal: The European Central Bank is alert to the risks of persistently low inflation, president Mario Draghi said on Monday amid speculation of further interest rates cuts to avert possible deflation.
At present, our expectation is that low inflation will be prolonged but gradually return to close to 2.0 per cent, Draghi told a central banking forum organised by the ECB in Sintra, Portugal.
Our responsibility is nonetheless to be alert to the risks to this scenario that might emerge and prepared for action if they do, Draghi said.
What we need to be particularly watchful for at the moment is, in my view, the potential for a negative spiral to take hold between low inflation, falling inflation expectations and credit, in particular in stressed countries, he said.
Inflation in the 18 countries that share the euro is currently way below the ECB's 2.0-per cent target, picking up only fractionally to 0.7 per cent in April.
According to the ECB's latest forecasts, area-wide inflation is projected to accelerate to 1.6 per cent in 2016.
But the ECB's chief economist Peter Praet recently pointed out that since the beginning of the year inflation tended to come out lower than expected.?
Spectre of deflation
The persistently low level of inflation has raised the spectre of deflation in the single currency area, a phenomenon whereby households and businesses put off expenditure in anticipation of falling prices, triggering a slump in activity.
At its policy meeting in Brussels earlier this month, Draghi had said the ECB's governing council was comfortable with the idea of easing monetary conditions next month.
While council voted to hold its key interest rate steady at its current all-time low of 0.25 percent for the seventh month in a row this month, Draghi gave the strongest hint yet that further easing is on the cards.
But a decision would depend on the central bank's latest inflation forecasts before taking concrete action.
One of the campaign arguments of anti-European Union or nationalist parties in the European parliament election on Sunday was that the bloc's key institutions - such as ECB are too distant and too bureaucratic.
Also speaking at the forum, the head of the so-called Eurogroup of finance minister, Jeroen Dijsselbloem, called for policy measures to boost growth in the region.
We need to have stronger growth and we need to take some measures to pick that growth up, he said.
'trust has returned to the Eurozone, growth is picking up. In almost all the countries growth has returned. But we need a stronger growth to get those jobs back, he said.
But quizzed about the possibility of an additional ECB rate cut next month, Dijsselbloem would say only that he believed 'strongly in the independence of the ECB.