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Frankfurt: The European Central Bank will do what’s necessary to ensure that inflation returns rapidly toward the goal of just under 2%, president Mario Draghi said. The euro fell.

“If we decide that the current trajectory of our policy is not sufficient to achieve that objective, we will do what we must to raise inflation as quickly as possible," Draghi said in a speech in Frankfurt on Friday. “In making our assessment of the risks to price stability, we will not ignore the fact that inflation has already been low for some time."

Draghi’s comments underline the ECB’s concern that the rate of inflation in the 19-nation euro area, currently 0.1%, is slipping further from their target, depressed by a high degree of slack in the economy and slumping oil prices. Policy makers are weighing whether an expansion to the €1.1 trillion ($1.2 trillion) quantitative-easing program started in March, or other measures such as taking the deposit rate further below zero, are needed.

The euro slid after the remarks and was down 0.6% at $1.0671 at 9:36am Frankfurt time.

Power instrument

“If we conclude that the balance of risks to our medium- term price stability objective is skewed to the downside, we will act by using all the instruments available within our mandate," Draghi said. “In particular, we consider the asset- purchase program to be a powerful and flexible instrument, as it can be adjusted in terms of size, composition or duration to achieve a more expansionary policy stance."

Draghi added that the interest rate on the deposit facility “can empower the transmission" of asset purchases, “not least by increasing the velocity of circulation of bank reserves." He also noted the risk that core inflation, which excludes energy and food, is too weak.

“Low core inflation is not something we can be relaxed about, as it has in the past been a good forecaster for where inflation will stabilize in the medium-term," he said. “While core industrial goods will receive support from the depreciation of the euro, an increase in core services inflation –- today close to an all-time minimum –- will depend on rising nominal wage growth. For that to pick up, the economy needs to move back to full capacity as quickly as possible." Bloomberg

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