The Guardian
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European Central Bank boss Mario Draghi
has dropped his broadest hint yet of imminent moves to head off
deflation when he said policy makers at the bank were "comfortable"
about action in early June.
Mario Draghi drops hint of imminent move to tackle risk of deflation
European Central Bank boss signals that a move could come once his economists produce forecasts for inflation in June
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Mario Draghi is 'comfortable' about action next month to tackle deflation. Photograph: Xinhua/Landov/Barcroft Media
European Central Bank boss Mario Draghi
has dropped his broadest hint yet of imminent moves to head off
deflation when he said policy makers at the bank were "comfortable"
about action in early June.
Upward pressure on the euro eased and yields on government bonds fell after the ECB president expressed concern that weak growth and the possible knock-on effects from the Ukraine could derail the eurozone's fragile recovery.
Although Draghi announced no change in policy following the meeting of the ECB's general council in Brussels, he signalled that a move could come once his in-house economists produce updated forecasts for inflation in the first few days of next month.
"I would say that the governing council is comfortable with acting next time but before we want to see the staff projections that will come out in early June," Draghi told a press conference.
"There is consensus about being dissatisfied with the projected path of inflation. So there is a consensus with not being resigned to expecting this," he said. "We have a consensus about action, but after seeing the staff projections in early June."
Inflation across the 18-nation eurozone currently stands at 0.7% but the financial markets expect it to fall closer to zero when the flash estimates of the May cost of living are published on June 3.
The ECB council meets two days later and while some analysts said Draghi had left himself some room for manoeuvre, most believe action from the ECB to counter deflationary pressures is all but inevitable.
"The recovery is proceeding but it is proceeding at a slow pace, and it still remains fairly modest, and there are some downward risks now," Draghi said. "The risks have to do with the possible weakening of global demand, have to do with geopolitical risks that are of serious significance, and have to do with … the exchange rate."
On the foreign exchanges, the euro moved close to $1.40 when the ECB said it was taking no immediate action. But it later dropped by more than a cent after Draghi's remarks at his press conference. The prospect of cuts in interest rates, possibly backed by the start of a eurozone quantitative easing programme also bore down on bond yields. In Germany, the interest rate on the 10-year bund dropped to 1.45%, close to last week's 11-year low.
City economists expressed doubts about whether ECB action would be enough to see off the threat from deflation. Dario Perkins, of Lombard Street Research, said the ECB seemed likely to offer a token rate cut in June, but remained some distance from more aggressive easing. "The ECB is hoping continued economic recovery will ease deflation fears, meaning QE isn't required. But the threat of deflation remains significant, even for some 'core' countries. With the ECB reluctant to properly insure against this prospect, a negative growth surprise is needed before we could see euro-area QE."
Jennifer McKeown, senior European economist, at Capital Economics, said: "The ECB signalled very strongly at today's press conference that policy will be loosened next month. A small cut in the main refinancing rate seems like the least that the Bank could do and is unlikely to be particularly effective. Bolder policy action, perhaps including asset purchases, should not be far off."
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Upward pressure on the euro eased and yields on government bonds fell after the ECB president expressed concern that weak growth and the possible knock-on effects from the Ukraine could derail the eurozone's fragile recovery.
Although Draghi announced no change in policy following the meeting of the ECB's general council in Brussels, he signalled that a move could come once his in-house economists produce updated forecasts for inflation in the first few days of next month.
"I would say that the governing council is comfortable with acting next time but before we want to see the staff projections that will come out in early June," Draghi told a press conference.
"There is consensus about being dissatisfied with the projected path of inflation. So there is a consensus with not being resigned to expecting this," he said. "We have a consensus about action, but after seeing the staff projections in early June."
Inflation across the 18-nation eurozone currently stands at 0.7% but the financial markets expect it to fall closer to zero when the flash estimates of the May cost of living are published on June 3.
The ECB council meets two days later and while some analysts said Draghi had left himself some room for manoeuvre, most believe action from the ECB to counter deflationary pressures is all but inevitable.
"The recovery is proceeding but it is proceeding at a slow pace, and it still remains fairly modest, and there are some downward risks now," Draghi said. "The risks have to do with the possible weakening of global demand, have to do with geopolitical risks that are of serious significance, and have to do with … the exchange rate."
On the foreign exchanges, the euro moved close to $1.40 when the ECB said it was taking no immediate action. But it later dropped by more than a cent after Draghi's remarks at his press conference. The prospect of cuts in interest rates, possibly backed by the start of a eurozone quantitative easing programme also bore down on bond yields. In Germany, the interest rate on the 10-year bund dropped to 1.45%, close to last week's 11-year low.
City economists expressed doubts about whether ECB action would be enough to see off the threat from deflation. Dario Perkins, of Lombard Street Research, said the ECB seemed likely to offer a token rate cut in June, but remained some distance from more aggressive easing. "The ECB is hoping continued economic recovery will ease deflation fears, meaning QE isn't required. But the threat of deflation remains significant, even for some 'core' countries. With the ECB reluctant to properly insure against this prospect, a negative growth surprise is needed before we could see euro-area QE."
Jennifer McKeown, senior European economist, at Capital Economics, said: "The ECB signalled very strongly at today's press conference that policy will be loosened next month. A small cut in the main refinancing rate seems like the least that the Bank could do and is unlikely to be particularly effective. Bolder policy action, perhaps including asset purchases, should not be far off."
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