ECB ready to act, keeps eye on bank stocks, oil prices: Draghi

Mon Feb 15, 2016 12:54pm EST
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By Francesco Guarascio and Balazs Koranyi

BRUSSELS/FRANKFURT (Reuters) - The European Central Bank is ready to ease policy further in March, President Mario Draghi said on Monday, highlighting risks from financial market volatility, a global slowdown in growth and low oil prices.

The ECB will examine risks emanating from weaker emerging market growth and look at whether plunging crude prices along with market turbulence could derail its efforts to boost inflation, Draghi told lawmakers in the European Parliament.

The ECB has missed its inflation target of close to 2 percent for three straight years and policymakers fear that a failure to get prices rising again would erode public confidence in the bank, rendering monetary policy ineffective and leaving Europe stuck in a trap of zero price growth.

"First, we will examine the strength of the pass-through of low imported inflation to domestic wage and price formation and to inflation expectations," Draghi said about the March 10 meeting of governors.

"Second, in the light of the recent financial turmoil, we will analyze the state of transmission of our monetary impulses by the financial system and in particular by banks," he added. "If either of these two factors entail downward risks to price stability, we will not hesitate to act."

Weeks of heightened market volatility has reversed much of the impact of the ECB's December easing, increasing pressure on the bank to ease further in March.

"Draghi moved beyond just the economic risks to the ECB’s forecasts - and included financial volatility and weakness of banks as a trigger for policy expansion," Citi strategist Richard Cochinos said.

Previous warnings focused on risks to price stability but an over 20 percent fall in euro zone banking shares since the start of the year could raise the cost of capital for banks, potentially holding back lending and reducing the effectiveness of the ECB's 1.5 trillion euro ($1.7 trillion) quantitative easing scheme.   Continued...

European Central Bank (ECB) President Mario Draghi testifies before the European Parliament's Economic and Monetary Affairs Committee in Brussels, Belgium, February 15, 2016. REUTERS/Yves Herman