GLOBAL MARKETS-Shares rise, euro slumps as ECB hints at fresh stimulus

20 Nov 2015 | Author: | No comments yet »

Draghi: ECB ‘won’t hesitate’ to offer stimulus.

Frankfurt, Germany • European Central Bank head Mario Draghi said the chief monetary authority for the eurozone “will not hesitate” to expand its stimulus program at its next meeting if needed to support the economic recovery.

Draghi’s speech at a banking forum in Frankfurt on Friday reinforced earlier statements taken by markets as a green light for the bank to take action at the Dec. 3 meeting of its governing council. Most major banks have stuck firmly to the view that the euro will fall toward parity with the dollar in the months ahead as the Federal Reserve begins to lift interest rates while the ECB takes the opposite course. Europe’s recovery is important for the troubled global economy, which has seen growth slow in emerging markets such as China even as Europe and the United States recover from the financial crisis of 2007-2009 and the eurozone’s troubles over government debt. Policymakers are weighing the need for an expansion to the €1.1 trillion (Dh4.32 trillion, $1.2 trillion) quantitative-easing programme that started in March, or measures such as taking the deposit rate further below zero. The euro, which earlier slipped back below $1.07 against the dollar, was down nearly three percent so far in November, on pace for its worst month performance since March.

Draghi on Friday suggested that the ECB would do whatever it takes to raise inflation as fast as possible, and pointed to the benefits of a cut in deposit rates to aid an expansion of its quantitative easing program of bond-buying. “The comments support expectations of additional, possibly aggressive, stimulus at the (ECB’s) December policy meeting,” said Shaun Osborne, chief currency strategist, at Scotiabank in Toronto. While Draghi and Executive Board member Peter Praet, the institution’s chief economist, have indicated more easing is in the cards, some governors have expressed unease. Estonia’s Ardo Hansson, Slovenia’s Bostjan Jazbec and Germany’s Jens Weidmann have signalled since the last meeting that they see no need to ease policy further just now. “I see no reason to talk down the economic outlook and paint a gloomy picture,” Weidmann said in a speech at the same event as Draghi. “Crucially, the decline in oil prices is more of an economic stimulus for the euro area than a harbinger of deflation.” Praet said in an interview this week that taking no action in circumstances of such low inflation risks the ECB’s credibility, and has argued that the fall in oil prices is increasingly a sign of weakening demand. “If we conclude that the balance of risks to our medium- term price stability objective is skewed to the downside, we will act by using all the instruments available within our mandate,” Draghi said. “In particular, we consider the asset- purchase programme to be a powerful and flexible instrument, as it can be adjusted in terms of size, composition or duration to achieve a more expansionary policy stance.” He added that the interest rate on the deposit facility “can empower the transmission” of asset purchases, “not least by increasing the velocity of circulation of bank reserves.” Draghi said core inflation, which excludes energy and food, is also a signal of too-weak price pressures. On the other hand, some investors may simply not have the appetite to put yet more money on the table just as the year is closing. “It’s hard not to say that you’re bullish on the U.S. dollar,” said Ken Lambden, senior investment manager at Barings Asset Management in London said at the Reuters summit this week. “But we don’t think U.S. growth is as strong as it looks.

While that’s the highest reading in more than two years, it’s still barely half the goal for the headline rate. “Low core inflation is not something we can be relaxed about, as it has in the past been a good forecaster for where inflation will stabilise in the medium-term,” he said. “While core industrial goods will receive support from the depreciation of the euro, an increase in core services inflation — today close to an all-time minimum — will depend on rising nominal wage growth. For that to pick up, the economy needs to move back to full capacity as quickly as possible.” The ECB is currently buying 60 billion euros a month of bonds and intends to do so through at least September 2016. And he said that increased growth has not led to a pickup in inflation, which at an annual 0.1 percent remains far below the ECB’s goal of just under 2 percent.

Draghi’s remarks were countered by cautionary statements at the forum from stimulus skeptic Jens Weidmann, who sits on the ECB’s policy-setting council by virtue of his job as head of Germany’s national central bank, the Bundesbank. While not an explicit goal of the ECB, a weaker euro has been one of the major results so far of the bank’s stimulus and has provided a boost to eurozone exporters.

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