Draghi prepares to act against risk of deflation

European Central Bank President Mario Draghi said he can't exclude the risk of deflation in the euro area, hinting that the likelihood of largescale quantitative easing is increasing.

"The risk that we don't fulfill our mandate of price stability is higher than it was six months ago," Draghi said in an interview. "We are in technical preparations to alter the size, speed and composition of our measures at the beginning of 2015, should this become necessary, to react to a too-long period of low inflation. There's unanimity in the ECB council on that."

While policy makers agree in principle, the debate over whether fresh stimulus is needed at this point has reopened a rift on the ECB's Governing Council that now comprises 25 officials after Lithuania joined the currency region on Jan. 1. With inflation seen turning negative this year, some have warned of a deflationary spiral, as others have urged waiting to allow previously agreed measures to show their effect.

Draghi said on deflation that "the risk cannot be entirely excluded, but it is limited" and "we have to act against such risk." Asked how much the ECB will have to spend on government bonds, he said "it's difficult to say." European Central Bank President Mario Draghi said the risk of the central bank not fulfilling its mandate of preserving price stability was higher now than half a year ago, and reiterated its readiness to act early this year should it become necessary.

In an interview, Draghi urged politicians to implement necessary reforms, reduce tax burdens and cut red tape to support the euro zone recovery, which Draghi said was "fragile and uneven". There was a limited risk of deflation in the euro zone, Draghi said, but if inflation remained too low for too long and led to receding inflation expectations and a delay in spending, the ECB would need to act to fulfill its mandate.

"The risk that we do not fulfill our mandate of price stability is higher than six months ago," Draghi was quoted as saying in an interview published on Friday. "We are in technical preparations to adjust the size, speed and compositions of our measures early 2015, should it become necessary to react to a too long period of low inflation. There is unanimity within the Governing Council on this." He added that government bond purchases were among the tools the ECB could use to fulfill its mandate, but that state financing -- which is prohibited by the EU treaty -- had to be avoided.

Printing money to buy government bonds, a step known as quantitative easing (QE), is seen as one of the last tools the ECB has to revive inflation, with the key interest rate at 0.05 percent and growing doubts about the impact of earlier measures.

Euro zone inflation stands at 0.3 percent, far below the ECB's target of just under 2 percent, and calls for more ECB action have grown louder as policymakers warn that plunging oil prices could push inflation below zero in coming months.

Concerns are that weaker price expectations could affect wages and investments and dampen growth prospects. Regardless, Draghi ruled out a break-up of the euro zone. "A break-up of the euro zone? That will not happen. That's why there is no plan B," he said. Draghi also said he had no desire to enter politics. "I do not want to be a politician," Draghi said. On Wednesday, Italy's 89-year-old President Giorgio Napolitano said he would step down soon because of his age. Commentators have mentioned Draghi as a possible successor in recent months. Asked by Handelsblatt whether he would be interested in succeeding Napolitano, Draghi said: "My mandate as ECB president continues until the year 2019."