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Frankfurt/Zurich: European Central Bank officials underlined their readiness to ease monetary policy even more should fresh risks to the economic outlook arise.

Vice President Vitor Constancio told a parliamentary hearing in Brussels on Thursday that the central bank is willing to do “whatever is needed" to return inflation to target, echoing a sentiment expressed by chief economist Peter Praet at a conference in Frankfurt. President Mario Draghi wrote in the foreword to the ECB’s annual report that policy makers won’t “surrender" to excessively low price growth.

“If further adverse shocks were to materialize, our measures could be recalibrated once more, commensurate with the strength of the headwind, also taking into account possible side-effects," Praet said in Frankfurt. Even before the latest round of stimulus, he said, the ECB’s measures “have provided significant support to output and inflation."

The euro fell after Praet’s comments and was 0.1% weaker at $1.1384 at 12:26 p.m. Frankfurt time.

Since the ECB last month cut rates to record lows and added corporate debt to the range of assets in its bond-buying program, policy makers have repeatedly emphasized that the central bank hasn’t run out of room to ease again. That pledge comes against a backdrop of increasing unease in financial markets over the use of negative interest rates and little sign that too-low inflation is responding to stimulus.

With concern about the pace of global growth, the ECB isn’t alone in its caution. Minutes of the Federal Reserve’s most recent meeting, released Wednesday, showed officials weighed the steady US expansion against heightened international risks before agreeing on a go-slow strategy that reduced the odds of a rate increase in the first half of the year.

The ECB policy makers stopped short of saying what additional tools they would consider, with both Constancio and Praet ruling out the use of “helicopter money" and Praet saying negative interest rates that persisted for two to three years would be “quite worrisome."

Helicopter money “remains a sort of academic concept," Praet said. “I can tell you it is not on the table, not even discussed in the governing council, even informally."

Fresh threats

The concept has come to the fore as central banks seek more and more extreme options to ward off deflation. It’s aim is to fuse monetary and fiscal policies and transmit cash as directly as possible to the economy, bypassing usual intermediaries, including banks.

Price growth in the 19-nation currency area has been below the ECB’s target of just under 2% for the past three years. Even with more than €1.7 trillion ($1.9 trillion) in quantitative easing already in the pipeline, the central bank doesn’t forecast a return to that goal before the end of 2018.

Euro-area inflation was negative for a second month in March, something that Constancio said could exacerbate the fight to return it to target.

“One of the problems is that we see now that there are second-round effects," the vice president said. “Headline inflation being negative is contaminating the core inflation when we exclude the price of energy and processed foods."

Draghi pledge

The unclear picture that the central bank has to counter was underscored by Draghi in the institution’s annual report.

“We face uncertainty about the outlook for the global economy," Draghi wrote. “We face continued disinflationary forces. And we face questions about the direction of Europe and its resilience to new shocks. In that environment, our commitment to our mandate will continue to be an anchor of confidence for the people of Europe."

While the ECB has defended its activism in the face of an only mildly supportive fiscal stance from governments in the euro area, policy makers are increasingly bemoaning the lack of political efforts to drive growth. Benoit Coeure, the ECB’s board member responsible for European affairs, said its policy would be more effective if others acted too.

“We very strongly believe that the best contribution we can make to the future of Europe, and to foster trust in Europe, is to focus on the ECB’s mandate," he said. “Making Europe credible starts with delivering on what has already been agreed before starting to invent new things." Bloomberg

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