Business World

Thursday 27 October 2016

Draghi eyes March QE review as risks rise

Francesco Canepa and John O'Donnell

Published 22/01/2016 | 02:30

ECB President Mario Draghi announces the interest rate decision at the bank’s headquarters in Frankfurt yesterday. Photo: Bloomberg
ECB President Mario Draghi announces the interest rate decision at the bank’s headquarters in Frankfurt yesterday. Photo: Bloomberg

Turmoil in financial markets and concerns over China and other emerging markets will prompt a March review of the European Central Bank's monetary policy, President Mario Draghi said yesterday, holding out the prospect of further loosening.

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The euro eased against the dollar as Mr Draghi, speaking after the ECB kept its main rates on hold, said the bank expected rates to "stay at present or lower levels for an extended period of time".

"As we start the new year, downside risks have increased again amid heightened uncertainty about emerging market economies' growth prospects, volatility in financial and commodity markets and geopolitical risks," he said.

"It will therefore be necessary to review and possibly reconsider our monetary policy stance at our next meeting in early March," he added, creating potential for earlier action than many in the market had expected.

Many analysts had been predicting a further 10-basis-point cut in the existing -0.30 deposit rate, but not until the June meeting of the Bank's policy-makers.

In December, the ECB Governing Council cut the deposit rate, increased the charge on banks for parking money at the ECB, and expanded its €1.5 trillion quantitative easing (QE) programme to buy chiefly government bonds. Defending the measures, which fell short of some investors' expectations, Mr Draghi said they were "entirely appropriate and effective" given what was known at the time, pointing out that the price of oil had slumped no less than 40pc since.

The ECB's December projections were based on crude oil prices averaging $52.2 in 2016, but Brent crude is at around $27 per barrel and even 2022 oil futures are below $50, indicating little confidence in a quick rebound.

"We are not surrendering in front of these global factors," he said, noting that lower energy costs should also serve to boost household consumption and investment.

While Mr Draghi insisted the Eurozone recovery was moving ahead, he acknowledged that risks to its outlook "remain on the downside", citing the fragility of the global economy and geopolitical risks.

The further dilemma for the ECB is that low energy prices are now impacting other goods and services, pushing even core inflation far from the bank's goal of close to 2pc and jeopardising the credibility of that target. "Inflation rates are currently expected to remain at very low or negative levels in the coming months and to pick up only later in 2016," he said.


Irish Independent

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