Published: Sat, November 19, 2016
Economy | By Melissa Porter

ECB's Mersch says bank will adjust policy very cautiously

ECB's Mersch says bank will adjust policy very cautiously

While the eurozone banking area is "healing", Draghi told a conference in Frankfurt that regulators can't drop their guard, and blamed two decades of excessive deregulation for the 2008 financial crash.

"We can not yet drop our guard", Mr. Draghi said at a banking conference here.

His commitment suggests that the central bank's balance sheet - now at 3.5 trillion euros ($3.7 trillion) and with more being added each month - won't shrink for the foreseeable future, even if the exact parameters of the ECB's quantitative easing change.

Draghi posed the question of whether the factors, which had allowed a recovery, are sufficient to deliver a sustained adjustment in the path of inflation.

The council is likely to make a decision in early December on whether to extend its landmark quantitative easing programme past the deadline of March 2017 and the bleak economic assessment add to expectations that the European Central Bank will continue to buy bonds at the same rate until at least the second half of 2017.

Inflation, below the bank's 2 percent target for over 3 years, is now on the way up, probably exceeding 1 percent early next year, a relief for the ECB but also an argument for the hawks on its Governing Council to reduce stimulus.

According to Draghi there are three other main risks to growth: geopolitics, banks' profitability and weakness in inflation dynamics. New ECB forecasts will also be published on December 8, with projections running to 2019 for the first time.

A new wave of bank rules known as Basel III is due to be finalised in January and come into force in 2019 after years of hard fought negotiations.

"So now is the time to finalise the regulatory agenda and enter a period of stability", the ECB´s boss said.

"And while marginal adjustments are possible, there should be no rolling back on what has been decided", said Draghi, whose bank supervises the euro zone's biggest banks.

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