Sunday 21 January 2018

Surprise as Draghi says it's 'wait and see' on expanding QE

ECB President Mario Draghi in Brussels yesterday
ECB President Mario Draghi in Brussels yesterday

Francesco Guarascio

The European Central Bank needs more time to assess if it will have to beef up its €1 trillion-plus asset-buying programme, ECB President Mario Draghi said yesterday.

The move confounds some expectations that the bank was ready to expand quantitative easing (QE).

Speaking to the European Parliament's Committee on Economic and Monetary Affairs, Mr Draghi said the bank was ready to act but needed more evidence to see if the emerging market slowdown, the euro's firming and the fall in commodity prices would hijack inflation from its projected path.

"The asset purchase programme has sufficient in-built flexibility," Mr Draghi said. "We will adjust its size, composition and duration as appropriate, if more monetary policy impulse should become necessary.

"More time is needed to determine in particular whether the loss of growth momentum in emerging markets is of a temporary or permanent nature and to assess the driving forces behind the drop in the international price of commodities and behind the recent episodes of severe financial turbulence."

Mr Draghi said it will take somewhat longer than previously anticipated for inflation to stabilise around the ECB's target of just under 2pc.

His comments come after the US Federal Reserve left rates on hold last week on concerns about China's economic slowdown, renewed financial market volatility and sluggish inflation at home.

Though the Fed left open the door to a hike later in the year, particularly as the US economy approaches full employment, its decision raised concerns that the emerging market slowdown, led by poor industrial demand in China, could have a bigger impact on advanced economies than earlier seen.

Purchasing Managers' Index data showed activity in China's factory sector unexpectedly shrank to a six and a half year year low in September, just the latest in a string of weak data for the world's second-largest economy. China's slowdown has depressed global commodity prices, a particular worry for the ECB as inflation, now at a barely visible 0.1pc, could miss the bank's target of almost 2pc for years to come, possibly forcing the ECB to beef up its QE programme.

Europe appears relatively resilient for now, with September PMI data showing only a small drop from relatively high levels, indicating that emerging market weakness is not derailing the Eurozone's slow but steady recovery. (Reuters)

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