Friday, May 9, 2014

ECB holds rates but Draghi hints at policy change


European Central Bank president Mario Draghi has hinted the bank's policymakers may act soon to reverse the eurozone's prolonged low inflation.
The ECB chief said on Thursday that the monetary authority was "not resigned" to low inflation, which at 0.7% is well below the 2% target.
The comments followed that ECB's decision to keep its benchmark interest rate at a record low of 0.25%.
Low inflation makes it harder for people and businesses to reduce debt.
Persistently low inflation across the eurozone has prompted growing calls for the ECB to cut rates to head off deflation risks.
But some analysts believe that recent positive economic data and improved financing conditions have reduced the urgency to act.
Mr Draghi said that the ECB would have new projections in June on the likely direction of inflation.
He said that the 24-member ECB council was "dissatisfied about the projected path of inflation" and is "not resigned to have too low inflation for too long a time".
However, he added that the ECB was "comfortable with acting next time", raising expectations that the bank could alter policy in June.
The euro fell on the comments to below $1.39, having earlier broken the $1.40 mark for the first time since November 2011.
Eurozone interest rates have been unchanged since November 2013.
Mr Draghi has been saying for months that the bank expected "a prolonged period of low inflation".
He said in April that if the inflation outlook was to deteriorate, the ECB could respond with a "broad-based asset purchase programme", probably quantitative easing - effectively printing money to buy assets.
Luke Bartholomew, investment manager at Aberdeen Asset Management, said: "ECB meetings are starting to have a Waiting for Godot feel: every month we think Draghi can't go any longer without doing something and every month we're left waiting."
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Analysis

It's all talk from Mario Draghi, and not for the first time. Once again, his reaction to inflation well below target, and the associated danger of deflation, is to say the ECB is ready to take action. The trouble is that all the options have drawbacks of one sort or another.
But maybe just talking about action will be enough. Expectations among businesses and households have a central role in inflation so words from the right person can make a difference. And the words were a bit stronger this time - there was a clear hint that the ECB might act in June.
Mr Draghi has shown the power of talk before. What defused the eurozone crisis was the ECB's commitment to buy government bonds if necessary. In the event the ECB has spent precisely nothing on this promise and still got the desired result, a sharp decline in eurozone government borrowing costs. It really was talk that did it.

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