European Central Bank increases forecast for inflation this year as economy recovers

FRANKFURT – The European Central Bank has raised its forecast for inflation this year to 0.3 per cent from zero previously, another sign that the risk of crippling deflation — a long-term drop in prices — may be fading.

ECB President head Mario Draghi made the announcement at a news conference Wednesday after the bank’s governing council decided to hold its key interest rate at a record low of 0.05 per cent.

The bank is pushing 1.1 trillion euros ($1.2 trillion) of monetary stimulus into the economy through 60 billion euros in monthly purchases of government and corporate bonds with newly printed money.

The aim of the stimulus is to raise inflation closer to the ECB’s goal of just under 2 per cent. Very low inflation has raised fears of long-term stagnation in the currency union. Low inflation is a sign of weak demand and can make it harder for indebted governments and consumers to reduce their debt burdens.

Preliminary signs suggest the program is working, as prices rose 0.3 per cent in the year to May after being flat in April.

Still, Draghi sought to dispel any suggestion that a brightening economic picture could lead the bank to prematurely scale back the bond purchases before the full 1.1 trillion euro goal is accomplished in September 2016.

He stressed Wednesday that the bank was intent on “full implementation” of the program. He said the bank’s measures “will support further improvements” in the availability of financing for businesses and consumers. That stimulates economic activity.

The eurozone economy grew 0.4 per cent in the first quarter, an improvement as the currency union struggles to work off a crisis over high government and bank debt. And though unemployment is edging down, it remains high at 11.1 per cent as of April. Economists say stronger growth is needed to bring the long-term unemployed back into the labour force.

Meanwhile, a survey released Wednesday by financial information company Markit said concerns over Greece are acting as “a brake on growth” in the eurozone. Its purchasing managers’ index — a broad gauge of business activity — for May fell to a 3-month low of 53.6 points from 53.9 the month before.

Draghi would not be drawn on commenting on the ongoing negotiations to give Greece more rescue loans. The ECB is a key player in Greece’s financial drama as it has been letting the country’s banks tap emergency credit that they can’t get elsewhere.

Greece is in talks with its creditors — other eurozone governments and the International Monetary Fund — on what kind of reforms it must make to get more loans.

Draghi said the ECB “wants Greece to stay in the euro, but it has to be a strong agreement” that puts Greece on a more stable path.


Pan Pylas in London contributed to this report.