ECB monitoring effects of Ukraine confrontation

04.03.14 @ 09:18

  1. By Benjamin Fox
  2. Benjamin email

BRUSSELS - The European Central Bank (ECB) is monitoring the possible economic effects of the Ukraine-Russia crisis, ECB chief Mario Draghi told EU lawmakers on Monday (3 March).

  • Draghi (c): 'The economic impact is likely to be relatively limited' (Photo: Stephanie Jones)

During a hearing at the European Parliament that was otherwise dominated by questions about the eurozone's low inflation rate, Draghi told MEPs that "the geopolitical dimensions of this could have themselves a strength and a capacity to affect events that go beyond the actual links and the statistical numbers."

“It is not only monetary policy but also a broader issue that may have an [impact] on the broader economy as well.”

But he said that Ukraine's trade links with the EU were "rather small".

"All in all, the economic impact is likely to be relatively limited," he said. The EU imported goods worth around €14.5 billion from Ukraine and exported €24 billion in 2012, less than 1 percent of its total demand.

Earlier, Russia's central bank raised its main interest rates from 5.5 percent to 7 percent on Monday after a day of market turmoil saw the rouble fall to an all-time low against the euro and US dollar and a 10 percent dive in the value of the country's stock market.

"The decision is directed at preventing risks to inflation and financial stability associated with the increased level of volatility in the financial markets," the Russian central bank said in a statement.

Meanwhile, Draghi played down fears about the bloc's low inflation rates, although he conceded that the 0.8 percent inflation rates recorded in January and February were "way below" the European Central Bank's 2 percent target for prices.

"US inflation is not much higher despite the fact that their recovery is way more advanced than ours," said Draghi, who stated that the low inflation rate was also a result of price adjustments in the EU's crisis countries.

He told deputies that the ECB would publish its forecasts for the eurozone's inflation rate between 2014 and 2016 on Thursday (6 March) to coincide with the bank's next meeting of its monetary policy committee.

"The longer it stays at the current level the more likely it is that inflation could become de-anchored from the 2 percent."

Draghi also rejected suggestions that the bank's Outright Monetary Transactions (OMT), which allows the ECB to buy potentially unlimited supplies of eurozone government bonds, was under threat.

The programme was launched in summer 2012 and has been widely credited as the single most effective action in reducing speculative pressures against government bonds and curbing the eurozone debt crisis.

But its legality has been questioned by the German Bundesbank which has laid down a legal challenge in the German Constitutional Court. Last month, the Karlsruhe-based court referred the issue to the European Court of Justice for a final ruling, although it indicated its opposition to the programme.

"The integrity of the euro area is an absolute precondition for us to be able to deliver on the mandate prescribed by the Treaty," said Draghi, adding that the programme was "fully legal" and was "ready to be used in the spirit in which it was designed."