December 16, 2013 / 6:03 PM / 5 years ago

ECB ready to act if inflation stays low for too long: Draghi

BRUSSELS (Reuters) - The European Central Bank is ready to intervene if inflation remains low for too long, President Mario Draghi said on Monday, adding that he was certain the euro zone will escape the fate of Japan.

European Central Bank (ECB) President Mario Draghi testifies before the European Parliament's Economic and Monetary Affairs Committee in Brussels December 16, 2013. REUTERS/Francois Lenoir

Draghi kept his cards close to his chest, however, and declined to discuss in detail the instruments it could use to counter any prolonged weakness in prices.

But he pointed out that the reason banks were not lending to households and companies was not because they lacked funding, suggesting more long-term ECB loans are unlikely for now.

Euro zone inflation has fallen far below the ECB’s target of below but close to 2 percent in recent months as the bloc crawls out of recession and banks try to clear their balance sheets of assets that turned sour during the crisis.

The situation reminds some observers of Japan in the 1990s after the burst of a real estate bubble pushed the country into a deflationary cycle from which it has still not fully recovered.

“We are fully aware of the downward risks that a protracted period of low inflation entails,” Draghi told the European parliament. “The Governing Council is ready and able to act if needed.”

“We don’t see a situation like Japan,” Draghi said.

“We looked at the differences, and the differences are essentially that medium- to long-term inflation expectations are firmly anchored in our case; they were not in Japan of the early 90s, early 2000s.”

He stressed that there were no deflationary risks in the euro zone, and that monetary stimulus in the euro zone had been much stronger than it was in Japan at that time.

The ECB cut its main refinancing rate to a record low of 0.25 percent in November, alarmed after euro zone inflation fell to 0.7 percent in October. It has also injected more than 1 trillion euros into the banking system to ease funding strains.

Banks have repaid about 40 percent of those funds already, Draghi pointed out, and he said risk-aversion and a lack of capital were among the reasons why banks were not lending to the real economy - and not a lack of funding.

A bank’s capital is the money it cannot lend out and must hold as a buffer against risk, while funding refers to how it gets money that it can then lend out.

The repayments mean that excess liquidity - the amount of money in the market beyond what banks need for their day-to-day operations - is falling, putting upward pressure on interbank lending rates, potentially crippling the fragile recovery.

“Excess liquidity in overnight money markets has been gradually receding. We are monitoring the potential impact of these developments on our monetary policy stance. We are ready to consider all available instruments,” Draghi said.

Reporting by Martin Santa, writing by Eva Taylor and Sakari Suoninen; Editing by Hugh Lawson

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