European Central Bank President Mario Draghi said the economic outlook is worsening and the bank stands ready to activate its bond-purchase program if governments fulfil the necessary conditions.

“We are ready to undertake” Outright Monetary Transactions, “which will help to avoid extreme scenarios,” Draghi said today at a press conference in Frankfurt after policy makers left the benchmark interest rate at a historic low of 0.75 percent. “The risks surrounding the economic outlook remain on the downside” and underlying inflation pressures “should remain moderate,” he said.

Draghi yesterday fueled speculation that the ECB might put rate reductions back on the agenda, saying the debt crisis is starting to hurt Germany — the pillar of economic strength in the euro area — and that inflation risks are “very low.” Still, Spain is resisting asking for a bailout that would open the door to ECB bond purchases, stalling the central bank's efforts to repair its monetary policy transmission mechanism.

“It's entirely up to Spain and the Spanish government to take the decision,” Draghi said. At the same time, “since the OMT announcement there have been a series of improvements” on financial markets, including “a return of flows from the rest of the world,” he said.

Economic confidence in the 17-member euro area fell to a three-year low in October, adding to signs that the region is in recession after gross domestic product shrank 0.2 percent in the second quarter. Third-quarter GDP is due on Nov. 15.

Draghi said the ECB will take the weakening economy into account when it publishes new economic and inflation forecasts next month.

“Certainly the outlook is being revised and there's a picture of a weaker economy,” he said. “The Governing Council decided to keep interest rates unchanged. We have not discussed what we're going to do next year in terms of monetary policy.”

Bloomberg News

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Draghi Says ECB Stands Ready to Buy Bonds

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