ECB prepares to launch fresh tools to battle low inflation

Policymakers have been preparing the ground for the ECB's package of new measures this week. In a speech in Portugal, Mr Draghi said it was the central bank's "responsibility" to be alert to the risks of low or negative inflation.

Eurozone inflation stood at just 0.7pc in April and is expected to remain at the same level in May.

"What we need to be particularly watchful for at the moment is, in my view, the potential for a negative spiral to take hold between low inflation, falling inflation expectations and credit, in particular in stressed countries," he said.

Deflation poses a threat to economies because if prices are falling people put off spending in anticipation of further falls. Retailers are forced to slash prices, which leads to declining profits, lower wages and people struggling to meet loan repayments because of falling salaries.

Eurozone banks are operationally ready for any move to introduce a negative deposit rate, according to reports. Reuters said banks in Germany, Austria, Ireland, Portugal and Slovakia were all ready to deal with negative cash flows from money on deposit.

The Bank of England also considered introducing negative interest rates at the height of the eurozone debt crisis. However, Martin Weale, an external member of the Bank of England's rate-setting committee, said last year that introducing negative rates in the UK would have signalled "a change in the nature of money as we know it".

He warned that companies could have started stashing money in secure warehouses instead of at the Bank of England if policymakers had made that move.

While the ECB is not expected to launch a full-scale quantitative easing programme at next Thursday's meeting, Mr Draghi reiterated that asset purchases remained an option. He said a destabilising of inflation expectations "would be the context for a broad-based asset purchase programme".

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