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European Central Bank President Mario Draghi said on Thursday that any worsening of the euro area inflation outlook may prompt the bank to adopt a broad-based asset buying scheme.
"Unlike the other contingencies, the objective here would not be to defend the current stance, but rather to increase meaningfully the degree of monetary accommodation," Draghi said in a speech in Amsterdam. He also noted that a tightening of policy stance can also result from further appreciation of the euro.
He ruled out any broad-based deflation risks in the euro area, saying falling food and energy prices along with weak demand has pushed inflation into low territory. Eurozone inflation eased to 0.5 percent in March, which is the lowest since November 2009.
Draghi listed some contingencies that could warrant policy action. These included an unwarranted tightening of the policy stance that could be due to renewed tensions in short-term money markets and the spillover of developments in global bond markets into euro area.
Further, a stronger euro could also prompt action from the ECB, he said. "The exchange rate is an increasingly important factor in our assessment of the outlook for price stability," Draghi said.
The exchange rate is not in itself a policy target, Draghi reiterated, adding that "a rise in the exchange rate, all else being equal, implies a tightening of monetary conditions, a downward impact on inflation and potentially a threat to the ongoing recovery."
"If so, this would call for policy action to maintain the current accommodative stance," he said.
The ECB policy response could include more conventional measures such as a further lowering of the interest rate corridor, including a negative deposit rate as well as a further extension of the fixed-rate full allotment procedure, the ECB Chief said.
The bank may also consider new liquidity injections via its liquidity operations, including longer-term fixed-rate operations, Draghi said.
Draghi also said further impairments in the policy transmission in particular, via the bank lending channel, could trigger policy action.
