Draghi Says Inflation Risks Prevail as Economy Stabilizes

European Central Bank President Mario Draghi said policy makers are prepared to act against inflation threats if needed, while assuring investors that the ECB doesn’t plan to withdraw emergency stimulus any time soon.

“All the necessary tools are available to address upside risks to price stability in a firm and timely manner,” Draghi said at a press conference in Frankfurt after the ECB held its benchmark rate at a record low of 1 percent today. At the same time, it’s premature to talk about the ECB’s exit strategy, Draghi said, adding that the economic outlook remains subject to downside risks and inflation will remain contained in the medium term.
The ECB is balancing the threat of inflation in Germany, Europe’s largest economy, against the need to fight the sovereign debt crisis. While nations from Greece to Spain are battling recessions and record unemployment, workers in Germany are winning some of the biggest pay increases in 20 years.

“We will pay particular attention to any signs of pass- through from energy prices to wages,” Draghi said. “However, looking ahead, in an environment of modest growth in the euro area and well-anchored long-term inflation expectations, underlying price pressures should remain limited.”

The euro was little changed after Draghi’s comments, trading at $1.3114 at 3:09 p.m. in Frankfurt
Inflation Breach

Higher energy costs will keep euro-area inflation above the ECB’s 2 percent limit this year before it slows in 2013, Draghi said.

He declined to comment on recent wage settlements in Germany, where 2 million public service workers are set for a 6.3 percent raise over two years, according to the Ver.di union. It would be the biggest increase negotiated by the union since 1992. IG Metall, Europe’s biggest labor union with about 3.6 million workers, is demanding 6.5 percent more pay.

Draghi’s inflation warning comes just months after the ECB cut rates and pumped more than 1 trillion euros ($1.3 trillion) of cheap cash into Europe’s banking system to stem the debt crisis.

The 17-nation euro economy will shrink 0.3 percent this year, according to the European Commission, which projects contractions in Italy, Spain, Belgium, Greece, Cyprus, the Netherlands, Portugal and Slovenia. By contrast, Germany’s economy is forecast to expand 0.6 percent.