ECB's Draghi throws door to QE wide open as recovery wanes

Published Fri, Nov 21, 2014 · 11:51 AM

[FRANKFURT] European Central Bank President Mario Draghi threw the door wide open on Friday for more dramatic action to rescue the euro zone economy, saying "excessively low" inflation had to be raised quickly by whatever means necessary.

Mr Draghi said there was now no sign of economic improvement in the months ahead and that the ECB would expand and step up its programme to pump more money into the currency bloc if its current measures fell short of lifting inflation.

"We will continue to meet our responsibility - we will do what we must to raise inflation and inflation expectations as fast as possible, as our price stability mandate requires of us," Mr Draghi said in a speech at an annual banking congress.

"If on its current trajectory our policy is not effective enough to achieve this, or further risks to the inflation outlook materialise, we would step up the pressure and broaden even more the channels through which we intervene, by altering accordingly the size, pace and composition of our purchases."

"Mr Draghi all but announced that the central bank will step up monetary easing soon. Mr Maybe has become Mr Definitely," said Nick Kounis, an economist with ABN Amro. "We think the ECB would exhaust other alternatives before moving to sovereign QE."

Mr Draghi had said on Monday further measures could involve large-scale purchases of government bonds, also known as quantitative easing - a step that is particularly opposed in the bloc's largest economy, Germany, for fear of mutualising risks.

The head of Germany's powerful Bundesbank, Jens Weidmann, in his speech at the same event, avoided the subject of monetary policy and instead spoke about banking regulation. "We can't be constantly commenting on one another," Mr Weidmann told reporters as he left the event shortly after his speech.

Mr Draghi's comments pushed 10-year government bond yields in Italy, Ireland and Austria to new all-time lows. The euro fell 0.8 per cent against the dollar and was down 1.1 per cent against the yen.

Mr Draghi's remarks were almost as dramatic as his "whatever it takes" speech in the summer of 2012 with which he pulled the eurozone back from the brink.

Having earlier in the week pointed to early signs of improvements, Mr Draghi on Friday said the economic situation remained difficult and the latest business survey suggested a stronger recovery was unlikely in the coming months. "Over shorter horizons, however, indicators have been declining to levels that I would deem excessively low," he said.

The eurozone economy has been mired in low growth and weak inflation for months. The ECB is trying to unblock lending to households and companies by flooding the market with billion of euros through purchases of securitised private debt.

But should these not be enough to bring inflation - now at 0.4 per cent - back to its medium-term target of just below 2 per cent, Mr Draghi said the ECB would recalibrate the size, pace and composition of our purchases as necessary. "This is why the Governing Council has tasked ECB staff and the relevant Eurosystem committees with ensuring the timely preparation of further measures to be implemented, if needed." This could include the purchasing of sovereign bonds.

The ECB would be the last of the major central banks to deploy QE, though several policymakers have raised concern that the costs of such a tool would outweigh the benefits.

Borrowing costs of eurozone governments have fallen to record lows since Mr Draghi's 2012 speech, which leads some observers to doubt the impact of QE in the eurozone because one key QE effect would be to weigh on long-term interest rates.

"It has never been cheaper for countries such as France to borrow. Buying state bonds could influence the price of state bonds, but wouldn't have much impact on the economy," said Michael Heise, the chief economist of Allianz.

Mr Draghi acknowledged the different financial structures in the eurozone, Japan and the United States, but stressed QE may still have an effect via the currency channel as banks would be expected to shift into assets outside the eurozone.

"There is evidence that both the various Large Scale Asset Purchase programmes of the Fed as well as the Bank of Japan's Quantitative and Qualitative Easing programme led to a significant depreciation of their respective exchange rates, even in a situation in which long-term yields were already very low, as in Japan," Mr Draghi said.



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