2017.06.2708:09:00UTC+00ECB's Draghi Seeks Prudence On Gradual Withdrawal Of Stimulus

The European Central Bank will need to be prudent in withdrawing monetary stimulus as that can be done only gradually with the euro area still in need of considerable policy support to bring inflation back to target in a sustainable way, ECB President Mario Draghi said Tuesday.

"In the current context where global uncertainties remain elevated, there are strong grounds for prudence in the adjustment of monetary policy parameters, even when accompanying the recovery," Draghi said in a speech at an ECB forum in Sintra, Portugal.

"Any adjustments to our stance have to be made gradually, and only when the improving dynamics that justify them appear sufficiently secure."

In its June 8 policy session, the ECB took its very first step towards exiting its massive stimulus - a mix of huge bond purchases and ultra-low interest rates - by shedding the downward bias on interest rates in its forward guidance.

The EUR 2.3 trillion asset purchase scheme is set to continue till the end of this year. Economists expect the ECB to announce a tapering move in September. The bank has already signaled that when it decides to withdraw stimulus, it would be gradual, meaning it will be distributed over several months.

Draghi expressed confidence that the ECB policy is working as it is able to boost demand and expects "its full effects on inflation will gradually materialise".

"But for that, our policy needs to be persistent, and we need to be prudent in how we adjust its parameters to improving economic conditions," he added.

The ECB Chief was also strongly confident on the inflation outlook and said that "The threat of deflation is gone and reflationary forces are at play".

That said, Eurozone is still in a situation of continuing slack, and where a long period of subpar inflation translates into a slower return of inflation to our objective.

"Inflation dynamics are not yet durable and self-sustaining," Draghi said. "So our monetary policy needs to be persistent."

Draghi stressed that a constant policy stance will become more accommodative as the economy continues to recover.

"The central bank can accompany the recovery by adjusting the parameters of its policy instruments - not in order to tighten the policy stance, but to keep it broadly unchanged," Draghi said.

He also noted that the monetary policy process of building up reflationary pressures is being slowed by a combination of external price shocks, more slack in the labor market and a changing relationship between slack and inflation.

"While these various reasons might delay the transmission of our monetary policy to prices, they will not prevent it," Draghi said.