Draghi Signals March ECB Stimulus

European Central Bank President Mario Draghi said on Thursday that there were no limits on what policy tools the bank can deploy to achieve its inflation goal and to boost euro area growth, and hinted that more stimulus measures may come in March as the downside risks such as global uncertainty, market volatility and geopolitics have increased.

Draghi pointed out that the downside risks have increased as the year began, amid heightened uncertainty about emerging market economies' growth prospects, volatility in financial and commodity markets, and geopolitical risks. Further, he said euro area inflation dynamics continue to be weaker than expected.

"It will therefore be necessary to review and possibly reconsider our monetary policy stance at our next meeting in early March, when the new staff macroeconomic projections become available which will also cover the year 2018," Draghi said in his introductory remarks at the customary post-decision press conference in Frankfurt.

Responding to reporters' questions, Draghi said the bank has several policy tools at its disposal and there was "no limit" as to what it can do in achieving its inflation and growth objectives. He also said that the ECB was willing and determined to use its policy tools when needed.

In the backdrop of the recent slump in oil prices, "the expected path of annual HICP inflation in 2016 is now significantly lower compared with the outlook in early December", Draghi said. He also noted that the ECB was closely monitoring the developments in China.

"Inflation rates are currently expected to remain at very low or negative levels in the coming months and to pick up only later in 2016," the central banker said.

He also noted that all inflation expectation measures have declined, and their correlation with current inflation and oil prices have increased.

Earlier Thursday, the 25-member Governing Council left the main refinancing rate unchanged at a record low 0.05 percent. After a 10 basis points cut in December, the deposit rate was kept at a record low -0.30 percent. The marginal lending rate was retained at 0.30 percent.

"We expect them to remain at present or lower levels for an extended period of time," Draghi said.

"The asset purchases are proceeding smoothly and continue to have a favorable impact on the cost and availability of credit for firms and households."

The extra policy measures undertaken by the ECB since mid-2014 are working, the policymaker noted, citing improvements in the real economy and, credit and financing conditions.

Till December, the ECB had maintained rates unchanged for ten consecutive sessions after reducing them by 10 basis points in September 2014.

In December, the ECB also decided to extend the monthly net asset purchases of EUR 60 billion to at least the end of March 2017, and to reinvest the principal payments on maturing securities for as long as necessary.

Draghi said the December measures were "fully appropriate" and will lead to "significant addition of liquidity to the banking system". These measures will also strengthen the ECB's forward guidance on interest rates, he added.

The bank expects the euro area economic recovery to proceed and expects the recent fall in oil prices to boost consumer spending to some extent.

"However, the economic recovery in the euro area continues to be dampened by subdued growth prospects in emerging markets, volatile financial markets, the necessary balance sheet adjustments in a number of sectors and the sluggish pace of implementation of structural reforms," Draghi said.

"The risks to the euro area growth outlook remain on the downside."

The ECB chief noted that these risks could weigh on global growth and foreign demand for euro area exports and economic sentiment. He maintained that the euro exchange rate is not a policy target, but said it will be affected by the policy actions of the bank.

Though inflation is expected to recover later this year and thereafter, risks of second-round effects should be monitored closely, Draghi said. The March ECB Staff projections will give the latest picture and will also initiate the forecasts for 2018, he added.

Draghi also sought growth-friendly fiscal consolidation and said the ongoing cyclical recovery must be supported by structural policies. He also noted that Europe's refugee crisis was an 'extraordinary' event.