Simon Kennedy and Alessandro Speciale Jackson Hole, Wyoming
MARIO Draghi has just pushed the European Central Bank (ECB) closer to quantitative easing (QE).
With euro zone data this week likely to show the weakest inflation rate since 2009, the ECB president used the high-powered central banking conference in Jackson Hole, Wyoming, to warn that investor bets on prices had “exhibited significant declines”.
Stocks rose and bond yields dropped with the euro yesterday as his comments fanned speculation that the ECB was finally heading for a form of monetary stimulus it has long avoided. Draghi has previously said a worsening of the medium-term inflation outlook would provide a reason for broad-based asset purchases.
The speech on Friday “was a major event and marked a turning point in ECB rhetoric”, said Philippe Gudin, the chief European economist at Barclays in Paris. “We think the recent economic developments have increased the chance of outright QE as the next step.”
Euro zone inflation slowed to 0.3 percent this month, according to the median forecast ahead of Friday’s report. Other releases this week are predicted to show unemployment sticking close to a record high and economic confidence falling.
Data yesterday showed business confidence in Germany slid for a fourth month.
Draghi showed his concern by singling out his preferred gauge of inflation expectations. The five-year/five-year inflation swap rate fell below 2 percent this month for the first time since October 2011.
“The governing council will acknowledge these developments and within its mandate will use all the available instruments needed to ensure price stability over the medium term,” Draghi said at the Federal Reserve Bank of Kansas City’s economic symposium.
Draghi fears that if inflation expectations keep falling, they will, in turn, affect actual inflation as investors, consumers and companies reduce spending in anticipation of even weaker prices. That could tip Europe into a deflationary spiral that would be hard to reverse.
Citigroup economists predicted last week that the ECB would unveil a QE programme in December valued at e1 trillion (R14.12 trillion), split between public and private assets and aimed at reducing borrowing costs and increasing liquidity. JPMorgan Chase said the ECB might enhance existing measures before buying bonds.
Draghi’s speech “prepares the ground for a debate that may result in more action”, said Greg Fuzesi, an economist at JPMorgan in London.
“It will be crucial to see how the data evolve in the coming weeks and how policymakers more broadly respond to Draghi’s speech.”
The ECB’s governing council next meets to set monetary policy and to issue fresh economic forecasts on September 4 in Frankfurt. It has so far avoided QE amid political, legal and logistical concerns over how such a programme would be carried out.
It still may not come.
Draghi did not mention QE directly in his speech and said he was “confident” that unprecedented measures announced in June would work.
In June the ECB reduced the benchmark interest rate to a record low of 0.15 percent and became the first major central bank to use a negative deposit rate. – Bloomberg