European Central Bank President Mario Draghi said inflation risks are “very low” and the debt crisis is starting to hurt Germany, Europe’s largest economy.
“Germany has so far been largely insulated from some of the difficulties elsewhere in the euro area,” Draghi said at a conference in Frankfurt Wednesday. “But the latest data suggest that these developments are now starting to affect the German economy.”
The European Commission cut its 2013 growth forecast for Germany to 0.8 percent from 1.7 percent and said the euro-area economy will expand just 0.1 percent after contracting 0.4 percent this year.
Germany sells about 40 percent of its exports within the 17-nation euro area. Factory orders and industrial production slumped in September and business confidence is at a 2 1/2 year low.
In the euro area, “overall economic activity is weak and it is expected to remain weak in the near term,” Draghi said. Because of that, inflation risks “are currently very low over the medium term,” he said.
The euro extended its decline after the comments, falling to $1.2744 at 2.10 p.m. in Frankfurt for a 0.6 percent drop. Draghi will chair an ECB policy meeting Thursday, when officials are forecast to keep the benchmark interest rate at a record low of 0.75 percent.
“While at first glance Draghi’s inflation comments sound quite dovish, it becomes clear that they are aimed at the German audience, trying to emphasize that the bond purchases will not drive up prices,” said Nick Matthews, senior European economist at Nomura International in London.
The ECB may nevertheless “revise down its growth forecasts next month and we’ll see then if policy makers are open to another rate cut. We don’t expect one tomorrow.”
Draghi is seeking backing in Germany for his plan to purchase government bonds, which is opposed by the Bundesbank and has been criticized in the German media even though it has Chancellor Angela Merkel’s blessing.
The ECB’s so-called Outright Monetary Transactions “will not lead to inflation” or “to greater risks for taxpayers in Germany,” he said.
If rising borrowing costs in some nations and investors’ bets on a breakup of the euro area “had been left unaddressed, it could have created a risk of deflation and threatened the ECB’s ability to ensure price stability,” Draghi said.
He reiterated that while the ECB could engage in unlimited government bond purchases if a country asks, “unlimited does not mean uncontrolled,” and countries will have to sign up to “strict conditionality.”
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