The European Central Bank today announced it was ready to act early next year should the euro area show signs of tipping into deflation and kept its key interest rates at record lows unchanged.
At its final policy meeting of the year, the ECB held its main "refinancing" rate steady at 0.05 per cent, and its two other rates -- the marginal lending and the deposit rates -- at 0.30 per cent and minus 0.20 per cent respectively.
But the ECB's decision to "substantially" downgrade its latest inflation and growth forecasts for the next three years suggested there is room for additional monetary easing.
ECB president Mario Draghi said the bank had stepped up preparations to undertake additional stimulus measures, such as central banks in Britain, Japan and the United States have done.
According to the ECB's new forecasts, inflation in the single currency area should average 0.5 per cent this year and pick up only gradually to 1.3 per cent in 2016, a long way off the central bank's target of around 2.0 per cent.
At the same time, area-wide economic growth would amount to a paltry 0.8 per cent in 2014 and expand to a lacklustre 1.5 per cent in 2016.
Low inflation or even falling prices may sound good for the consumer, but now from a central bank's point of view.
They can trigger a vicious spiral where businesses and households delay purchases, throttling demand and causing companies to lay off workers.
Draghi insisted that the raft of different measures so far "will further ease the monetary policy stance more broadly" in the coming months.
The ECB would then "early next year reassess the monetary stimulus achieved, the expansion of the balance sheet and the outlook for price developments," Draghi told a news conference in Frankfurt.
"Should it become necessary to further address risks of too prolonged a period of low inflation, the governing council remains unanimous in its commitment to using additional unconventional instruments within its mandate. This would imply altering early next year the size, pace and composition of our measures."
The ECB has already cut its interest rates to new all-time lows, made unprecedented amounts of cheap loans available to banks via its LTRO and TLTRO programmes, and embarked on asset purchase programmes (ABSs and covered bonds) to pump liquidity into the financial system.
But it has also hinted at more radical action in the form of quantitative easing (QE), a policy used by other central banks to stimulate their sluggish economies.
