FRANKFURT (Reuters) - The European Central Bank needs further evidence that inflation is rising towards its target and will end asset buys only when it is satisfied that price growth is on a sustained path towards its objective, ECB President Mario Draghi said on Wednesday.
After the ECB dropped a long-standing pledge last week to increase its bond buying if needed, investors are looking for clues to its next move. They expect policymakers to end lavish stimulus later this year, satisfied that economic growth has become self-sustaining and that inflation will slowly rise.
"We currently see inflation converging towards our aim over the medium term, and we are more confident than in the past this convergence will come to pass," Draghi told a conference. "But we still need to see further evidence that inflation dynamics are moving in the right direction.
"There is a very clear condition for us to bring net asset purchases to an end: we need to see a sustained adjustment in the path of inflation towards our aim," he added.
The euro zone's central bank has been clawing back stimulus by the smallest of increments, worried that any big move could unravel its work and force it into an embarrassing and economically damaging policy reversal.
Its caution is underlined by weak inflation. Consumer prices are likely to undershoot the ECB's target of just under 2 percent for years to come, even though the 19-member currency bloc is enjoying its fifth year of expansion, its best growth run since the global financial crisis.
"Adjustments to our policy will remain predictable, and they will proceed at a measured pace that is most appropriate for inflation convergence to consolidate," Draghi said.
"Net asset purchases remain necessary for now to validate the stimulus that is already priced into key indices of financial conditions," he added. "When progress towards a sustained adjustment in the path of inflation is judged to be sufficient, net purchases will come to an end."
Draghi said the sequencing prescribed in the ECB's policy guidance will not change.
He added that U.S. trade restrictions are a source of uncertainty but initial estimates suggest the first-round effect of these measures is likely to be small for the euro area.
The ECB's 2.55 trillion euro bond buying programme, launched three years ago to revive inflation, is due to expire at the end of September and financial markets are betting that purchases will end by the close of the year after a three-month wind down.
A first post-crisis interest rate hike is expected in the second half of 2019 with the deposit rate seen rising back to zero from minus 0.4 percent by the end of the year, a Reuters poll of economists showed.
The next step towards the exit could be a revision of the ECB's policy guidance, which currently stipulates that asset purchases will continue until inflation rebounds.
But with 4.5 trillion euros of assets on its balance sheet, some policymakers argue that new purchases would be only a drop in the bucket and that the ECB should broaden its focus to all policy instruments, dropping its emphasis on bond buys.
(Reporting by Balazs Koranyi; Editing by Catherine Evans)
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