Five Things Everyone Will Be Talking About Today

20 Nov 2015 | Author: | No comments yet »

ECB willing to act fast to boost inflation, Draghi says.

The euro fell for the first time in three days after European Central Bank President Mario Draghi said policy makers will do what they must to raise inflation “as quickly as possible.” The shared currency approached a seven-month low against the dollar and weakened versus all but one of its 16 major peers. Mario Draghi highlighted changes to the ECB’s asset purchase program and deposit rate as possible tools to stop inflation from falling further below its target of just under 2 per cent. Still, markets have broadly rallied this week after recovering from a brief initial shock sparked by the Paris terror attacks last Friday as investors perceived the events as unlikely to have inflicted major economic damage. Draghi said the strength of the euro zone’s recovery was modest and the global outlook for demand, particularly in emerging countries, had worsened significantly in recent months.

Stocks gained after the Federal Reserve’s October meeting minutes released late Wednesday showed officials appeared on track to raise interest rates in December from ultralow levels, reducing some uncertainty hanging over markets. His views appeared likely to meet some objections on the ECB’s decision-making Governing Council, which includes the bank’s executive board members and the governors of the bloc’s 19 central banks. Since then, the euro has weakened almost 6 percent versus the dollar as traders increased bets that officials may extend the bond-buying program or further cut the deposit rate. “We should be in little doubt that the ECB are again attempting to adjust the monetary policy dial, likely via extending and increasing QE, while another cut in the deposit rate is also on the cards,” said Jeremy Stretch, head of foreign-exchange strategy at Canadian Imperial Bank of Commerce in London. “While far from an explicit aim, easing monetary conditions via a cheaper euro is also a positive by-product of such policies.” The euro declined 0.5 percent to $1.0684 at 6:55 a.m.

The ECB has bought €60-billion ($64-billion) a month of mostly government bonds since March to help revive inflation, but prices rose just 0.1 per cent in October. This was another sign that further easing is a strong possibility at the bank’s next meeting in December—something that was also reflected in the ECB’s minutes from its October meeting released Thursday. German producer prices fell an annual 2.3 percent in October, after a 2.1 percent decline the previous month, the nation’s federal statistics office said Friday. Some questioned the benefits of ultra-low rates, with Deutsche Bank’s Co-Chief Executive Juergen Fitschen telling the same conference that the ensuing increase in bank lending volumes might not be enough to offset the hit to margins the policy had also caused. On Friday, Draghi described the central bank’s bond-buying program as a “powerful and flexible instrument” that can be adjusted in its size, composition and duration to further loosen policy.

Draghi has left the door open to adjusting its bond-buying program and a further cut to its deposit rate, which is already in negative territory. “Both the ECB and the Fed minutes effectively confirmed what we already know, but they left key questions open,” said Philip Shaw, chief economist at Investec. The ECB will get updated inflation forecasts from its staff at the December meeting and has already said conditions have worsened since its latest estimates were published in September. He warned that the longer ultra-loose monetary policy was in place, the less effective it can become. “ECB president’s speech reiterates the dovish bias,” said Peter Dragicevich, a foreign-exchange strategist at Commonwealth Bank of Australia in London. “Draghi is not trying to water down expectations ahead of the ECB meeting.”

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