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Draghi says ECB action can and will return inflation to goal

Mario Draghi said the European Central Bank's expanded asset purchases will succeed in pushing inflation in the euro area back toward its goal.

[FRANKFURT] Mario Draghi said the European Central Bank's expanded asset purchases will succeed in pushing inflation in the euro area back toward its goal.

"We can deploy and we will deploy monetary policy in a way that can and will stabilize inflation in line with our objective," the ECB president said at a conference in Frankfurt, three days into his 1.1 trillion-euro (S$1.64 trillion) bond-buying program.

"Our monetary policy is certainly supporting the recovery."

In his first public appearance since QE started, Mr Draghi can point to falling yields on government debt and a slide in the euro as signs that the program to buy 60 billion euros a month of sovereign and private-sector debt is making a mark. What he can't yet show is whether banks and companies will respond by putting the fresh cash to work in the real economy.

The yield on 5-year German bonds was minus 0.12 per cent at 9:57 am Frankfurt time and 10-year Spanish debt was at 1.23 per cent. The euro was down 0.4 per cent at US$1.065.

Mr Draghi's speech on Wednesday was followed by comments from Executive Board member Peter Praet, the ECB's chief economist. He's responsible for projections that quantitative easing will revive euro-area inflation and deliver the fastest economic growth in seven years.

"The signal that we wanted to give is that we don't have an instrument vacuum," Mr Praet said. "For monetary dominance to prevail, there should be no ambiguity on the willingness and the ability of the central bank to use all the tools available to fulfill its mandate."

Governing Council members Erkki Liikanen and Ewald Nowotny, the heads of the Finnish and Austrian central banks, will take part in separate panel discussions. Frankfurt-based Jens Weidmann, the Bundesbank president who opposed QE, isn't scheduled to speak.

The aim of QE is to return inflation to the ECB's goal of just under 2 per cent, a level not seen since early 2012. Macroeconomic forecasts unveiled by Draghi after the March 5 monetary-policy meeting in Cyprus showed consumer prices flat this year, with average inflation of 1.5 per cent next year and 1.8 per cent in 2017.

The central bank lifted its outlook for growth in gross domestic product this year to 1.5 per cent from 1 per cent, for 2016 to 1.9 per cent, and projected 2.1 per cent in 2017. The economy hasn't expanded faster than 2 per cent since 2007.

Mr Draghi and Mr Praet said those projections are dependent on the full implementation of all ECB stimulus measures. QE is scheduled to run through September 2016 or until there is a "sustained adjustment" in the path of inflation. Weekly summaries of purchases will be published on the ECB's website, with a more detailed breakdown released monthly.

That'll give some insight into how willing bondholders are to sell. The rally in government debt this week that pushed Italian and Spanish 10-year yields to record lows and German five-year yields further below zero could prompt some investors to wait for further price gains before they sell.

Executive Board member Benoit Coeure, one of the architects of QE who is responsible for market operations at the ECB, said he doesn't see supply as a problem, and that scarcity of bonds is not the same as a shortage.

"While the effective supply of eligible securities is undoubtedly lower than the total amount outstanding, I do believe that it will still be substantially higher than the amounts we intend to purchase," he said in Frankfurt on Tuesday. "If this is the case, there will be a price at which we can buy the quantities needed to meet our monthly targets."

Mr Coeure said scarcity may materialize first and foremost in those market segments with a higher duration. National central banks will try to avoid buying specific securities such as current cheapest-to-deliver bonds underlying futures contracts, securities commanding "special" rates in the repo market as a sign of temporary scarcity, and other assets displaying significant liquidity shortages, he said.

The ECB says its strategy for buying 60 billion euros a month of debt is to break the purchases down into daily targets listed on a spreadsheet that is sent to the national central banks. Those central banks will strive to meet the daily targets, with more flexibility on the final trading day of each month. At least three quotes are needed for each security, with the central bank buying at the cheapest price.

National central banks won't buy government debt in the primary market, which would infringe a law against monetary financing, and will wait a number of days after a new issue before buying in the secondary market. The ECB hasn't revealed the precise duration of that interval.


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