European Central Bank chief Draghi strengthens QE signal

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By Claire Jones in Frankfurt

Whatapp NewsTelegram News

The European Central Bank has given its strongest signal yet that it is prepared to embrace quantitative easing to prevent the eurozone from sliding into deflation or even a prolonged period of low inflation.

The ECB ignored calls from Christine Lagarde, managing director of the International Monetary Fund, to deploy immediately exceptional monetary policy measures, such as bond buying, and kept interest rates at 0.25 per cent for the fifth month in a row.

But Mario Draghi, ECB president, sought to address concerns the central bank is complacent about ultra-low inflation by saying the governing council was united in its support for more radical action should the outlook disappoint.

“The governing council is unanimous in its commitment to using also unconventional instruments within its mandate in order to cope effectively with risks of a too-prolonged period of low inflation,” he said.

His comments caused the euro to fall 0.4 per cent against the dollar to $1.3716 by the end of the London day, its lowest since late February. Italian, Spanish and Portuguese bond yields, which move inversely to prices, fell to multiyear lows.

Mr Draghi later confirmed these unconventional measures included government bond- buying. “All instruments that fall within the mandate, including QE are intended to be part of this statement,” he said, adding that policy makers had discussed QE at the meeting.

He stressed, however, that the council was yet to exhaust its conventional armoury, suggesting any launch of QE would come only after more rate cuts.

While other leading central banks, including the US Federal Reserve and the Bank of England, embraced QE early in the financial crisis, the ECB has been reluctant to follow suit.

Mr Draghi’s statement of intent lowers the bar for QE by signalling that the ECB will buy bonds not just if prices fall, but also if further signs emerge that inflation will remain very low for an extended period.

Eurozone inflation is now at its lowest level for four years, at 0.5 per cent – about a quarter of the central bank’s target of just below 2 per cent. Its latest forecasts show inflation will rise towards the target, hitting 1.7 per cent in 2016.

Mr Draghi pinned much of the blame for the latest fall on last year’s early Easter – the period when companies tend to raise prices – and subdued energy costs, but he acknowledged policy makers had been surprised by the extent of the fall last month.

He also admitted that policy makers had been repeatedly caught out by the weakness of price pressures, forcing them to lower inflation forecasts.

But there was scepticism about the ECB’s latest stab at convincing that it was willing to deploy more radical tools.

“The council did not act in response to weak inflation . . . it is not clear the council will act in the future,” said Richard Barwell, at Royal Bank of Scotland. The market was likely “to digest talk of unanimous support for unconventional measures with relish and continue romancing the possibility of ECB QE. In time the focus will shift back to the fact that the council did not cut rates.”

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