Draghi hints ECB may be set for further stimulus
European Central Bank head Mario Draghi may be preparing for further stimulus, say analysts, interpreting his comments last week. He has already dropped hints that the ECB's quantitative easing (QE) programme will be extended beyond its September 2016 putative deadline, sparking speculation among economists as to if and when the move might be announced.
The massive QE programme was launched in March this year to help push inflation back towards the targeted 2pc level and boost liquidity in the 19-country euro zone.
In May last year, as the threat of deflation stalked a euro area barely out of recession, the ECB president's comments (that his Governing Council was comfortable with acting) prefigured interest-rate cuts and a programme of targeted long-term loans the following month.
In November, Draghi saying ECB committees had been "tasked" with preparing further measures was a precursor to the announcement of quantitative easing in January.
Last Thursday in Malta, Draghi said the committees have been given their orders again and that the ECB wanted to be "vigilant," echoing his predecessor Jean-Claude Trichet's preferred signal for an imminent policy change.
Investors took the hint, sending the euro tumbling and German bond yields to a record low - and set economists debating whether policy makers will cut rates, expand QE, do both or even more.
"QE2 is coming for sure," said Marco Valli, chief eurozone economist at UniCredit in Milan, referring to a ramp-up of the ECB's asset-purchase programme before it is even halfway through. "When Draghi is concerned about tighter financial conditions, especially via the exchange rate, he always does a good job of communicating it to the market."
That communication is an acknowledgment that the euro area's fragile economic recovery is at risk of being derailed.
An emerging-market slowdown is dragging on global trade and a rising currency is putting further downward pressure on an inflation rate that dropped below zero last month.
While Draghi reiterated his belief that the 19-nation currency bloc is not in deflation, or a downward spiral of prices and wages, he made clear he's ready to act to stem what executive board member Peter Praet two weeks ago called a "seeping pessimism" in the euro area. Falling prices and potentially weakening growth in the region are raising the prospect of more stimulus, Markit Economics said last Friday.
While a Purchasing Managers' Index for manufacturing and services unexpectedly increased to 54 in October from 53.6 in September, signalling a pick-up in activity, forward-looking indicators point to a risk of a slowdown, it said. Service-sector expectations for the year ahead fell to a 10-month low, while the factory orders-to-inventory ratio dipped to the weakest level in nine months.
Sunday Indo Business