ECB to keep deploying tools to combat low inflation risk: Visco

Bloomberg

The European Central Bank will keep using all instruments at its disposal to counter the risk of low inflation in the euro region, Governing Council member Ignazio Visco said.
“For monetary policy, the main challenge remains the persistence of excessively low inflation,” Visco, who is also governor of the Bank of Italy, said in a speech delivered on Tuesday in Rome at the central bank’s annual meeting. “We will continue if necessary to deploy all the instruments made available to us in our mandate.”
The ECB will release updated economic forecasts on Thursday that could provide further clues about the impact of its stimulus programme. The Frankfurt-based central bank’s Vice President Vitor Constancio said last week that he thinks euro-area inflation will be close to the ECB’s goal of just under 2 percent two years from now, reflecting the unconventional policies it deployed and rising oil prices.
Euro-area consumer prices failed to rise for a fourth consecutive month in May. Prices fell 0.1 percent from a year earlier, the European Union’s statistics office in Luxembourg said. In Italy, the inflation rate was minus 0.3 percent compared with 0.4 percent in the previous month, the country’s statistic office said in a separate report.
In March, the ECB predicted the inflation rate in the euro area would average 0.1 percent this year, before accelerating to 1.3 percent in 2017 and 1.6 percent in 2018. Asked in a Bloomberg Television interview whether he believes consumer prices will rise faster in two years than currently forecast, Constancio said he “certainly personally expects” so.

‘Harmful’ Dynamic
“Like excessively high inflation, an overly subdued price dynamic is also harmful for economic and financial stability, especially when public and private debt are high and growth is weak,” Visco said in its speech. Low inflation “stems from the fall in oil prices, but it also depends, to a significant extent on internal dynamics,” he added, citing “margins of unused plant capacity and available labor.”
At a meeting in Vienna the ECB Governing Council is expected to keep its ultra-loose policy unchanged again after it expanded quantitative easing by a third to 80 billion euros ($89 billion) in March and cut the deposit rate further below zero.
Euro-area economic confidence rose in May to the highest level in four months, with sentiment among consumers and in retailing and construction improving, while the one for industry remained unchanged and the gauge for services declining.
Visco also said today that the signs that the Italian economy is coming back to growth are “unmistakable, especially for domestic demand.” The nation’s recovery from its longest recession since World War II “initially concentrated in the manufacturing sector, later spread to services and, somewhat hesitantly, to construction,” he said.
Still, the downside risk to the economic environment may ‘hinder the achievement’ of the government’s goal of reducing Italy’s debt-to-gross-domestic-product this year.
Italian business and consumer
confidence unexpectedly declined in May, showing growing pessimism among executives and households about the strength of the rebound in the euro region’s third-biggest
economy.
Italy’s gross domestic product is forecast to expand 1.1 percent this year, the International Monetary Fund said.