Draghi’s salvo to choke off threat of deflation

European Central Bank (ECB) president Mario Draghi yesterday unveiled forecasts showing higher economic growth with an inflation outlook that puts the ECB on track to reach its inflation goal. Photo: EPA

European Central Bank (ECB) president Mario Draghi yesterday unveiled forecasts showing higher economic growth with an inflation outlook that puts the ECB on track to reach its inflation goal. Photo: EPA

Published Mar 6, 2015

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Stefan Riecher Frankfurt

Mario Draghi primed investors to be ready for the European Central Bank’s (ECB) first bond-buying salvo on Monday as he signalled officials are convinced the measure will succeed in choking off the threat of deflation.

Six years after the Federal Reserve began its own quantitative easing programme, the ECB’s governing council committed to begin asset purchases next week that will amount to e60 billion (R786bn) a month, its president said in Nicosia.

He also unveiled forecasts showing higher economic growth with an inflation outlook that put the ECB on track to reach its inflation goal of just below 2 percent.

The ECB would buy assets “in any case until we see a sustained adjustment in the path of inflation” towards the ECB’s aim, Draghi yesterday said at a press conference in the Cypriot capital .

The “measures will contribute” to achieving that goal, he said.

Draghi’s push to lead the 19-nation currency bloc into a new monetary-policy era by embarking on QE added to a range of prior stimulus measures that had so far failed to raise consumer prices in the region.

Since June, the central bank has cut interest rates twice, offered cheap long-term loans for banks and started buying asset-backed securities and covered bonds.

At their decision yesterday, policymakers left the benchmark rate at a record low of 0.05 percent, the deposit rate at minus 0.2 percent, and the marginal lending rate at 0.3 percent.

The Frankfurt-based institution now predicts consumer prices to remain unchanged this year before increasing 1.5 percent next year and 1.8 percent in 2017, Draghi said.

Officials revised projections for economic growth upwards, partly due to a drop in oil prices, and expects gross domestic product to expand 1.5 percent this year, 1.9 percent in 2016 and 2.1 percent in 2017.

Meanwhile, the euro weakened to an 11-year low against the dollar on Wednesday. The currency yesterday touched $1.1026, the lowest since September 2003.

“The combination of deposit rates negative and QE is a very potent one, so it’s very euro-negative,” Robin Brooks, New York-based chief currency strategist at Goldman Sachs, said in an interview in Sydney.

“We are big proponents of euro weakness.”

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