February 5, 2018 / 4:21 PM / 4 months ago

ECB's Draghi warns of inflation headwinds from euro volatility

STRASBOURG (Reuters) - The European Central Bank is increasingly confident that inflation will rise on the back of rapid economic growth but currency market volatility is a potential obstacle, ECB President Mario Draghi said on Monday.

European Central Bank (ECB) President Mario Draghi holds a news conference following the governing council's interest rate decision at the ECB headquarters in Frankfurt, Germany, January 25, 2018. REUTERS/Kai Pfaffenbach

He told the European Parliament the euro’s exchange rate and its effects would be closely monitored by the ECB.

“While our confidence that inflation will converge towards our aim of below, but close to, 2 percent has strengthened, we cannot yet declare victory on this front,” Draghi said in Strasbourg.

“New headwinds have arisen from the recent volatility in the exchange rate, whose implications for the medium-term outlook for price stability require close monitoring,” Draghi said in a speech that hardened up the bank’s latest policy message, as he inserted “close” before “monitoring”.

Having fought off the threat of deflation with an arsenal of unconventional policy measures, the ECB is now debating whether to curb stimulus and rely more heavily on conventional tools, like interest rates, as the economy returns to health.

It left its ultra easy policy unchanged last month, warning that inflation remains muted and may take several more years before it rises back to the bank’s target of almost 2 percent.

But with the euro zone economy motoring ahead and unemployment falling rapidly, the ECB is expected to end its more than three-year, 2.55 trillion euro ($3.17 trillion) bond purchase programme by the end of this year.

“The euro area economy is expanding robustly, with stronger growth rates than previously expected and significantly above potential,” Draghi said. “These developments bode well for economic growth, as expansions tend to be stronger and more resilient when growth is broad-based.”

Draghi nevertheless emphasized that the ECB would be patient and persistent with policy to let underlying inflation pressures build up.

($1 = 0.8055 euros)

Reporting by Robert-Jan Bartunek; Writing by Balazs Koranyi; Editing by Francesco Canepa and Catherine Evans

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