12 May 2014

ECB: Draghi signals imminent action to combat low eurozone inflation.

By Financial Times, London.
Mario Draghi has signalled that the ECB will loosen monetary policy next month to flight persistently low eurozone inflation, as the central bank left its benchmark interest rate at a record low for sixth month. The ECB President said at his monthly press conference last 8th May that the “governing council was comfortable with acting next time”, adding that there was consensus within the council over “dissatisfaction about the projected path of inflation”.
The Euro which had risen close to the $1.40 mark on the announcement that the ECB had left its interest rates unchanged, tell to $1.387 on Mr Draghi’s remarks.
Eurozone equity and bonds also rallied.
Italy’s and Spain’s 10 year yields fell 5 basis points to below 3% to hit fresh euro-era lows, while Portugal’s 10 year yield fell 4bp to 3.51%.
The FTSE Eurofirst 300 closed up 1% at 1.358.91. Pressure as been growing on the ECB to act, with inflation in the currency bloc languishing at 7.0%, less than half of the central bank’s target of close to 2%. It is expected to remain below target until at least the end of 2016.
If the ECB acts at next month’s meeting, then it is likely to cut its benchmark main refinancing rate from the current record low of 0.25%. It could also become the first major central bank to cut the rate it pays on deposits in its coffers to below zero, in effect imposing a tax on lenders.
Nick Matthews, an economist at Nomura, said “Mr Draghi made it clear [that policy makers] are dissatisfied with the projected path of inflation and not resigned to accept it.”
The central bank has faced pressure to act to stave off the threat of persistently low inflation, which risks undermining the bloc’s recovery by raising debt burdens on governments and householders.
In spite to the improvement in some data, Mr Draghi maintained his view that economic growth remains weak. He said a stronger Euro “in the context of low inflation activity is a cause for serious concern”.
The ECB’s decisioon to hold back on further easing is likely to be met with frustration by some European governments, which have called on the central bank to do more to rein in the euro’s gains.
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