ECB President Mario Draghi drops hints of more stimulus to come

Deutsche Welle
4 Min Read

The European Central Bank has held its first meeting since Chinese markets tumbled following sharply reduced growth predictions. These have had a run-on effect on the eurozone, with both growth and inflation falling.
The European Central Bank is ready to increase the scope of its stimulus program in the face of Chinese-led market jitters, but Greece will remain outside the program for now, the bank’s head said Thursday.

European markets rallied but the euro fell 1 percent to $1.1100 after bank President Mario Draghi announced lower growth and forecasts and said more stimulus could be on the cards if inflation failed to pick up in the eurozone.

Germany’s DAX added 3.1 percent, France’s CAC-40 rose 2.8 percent and Britain’s FTSE 100 rose 2 percent. In New York, too, the Dow gained more than 1 percent on the news.

Following a board meeting in Frankfurt, Draghi said the bank would leave rates unchanged for now. But he warned a further slowdown was possible, which he blamed on a weakness in emerging markets.

If that happened, he said, the bank would step in with a longer and more robust bond-buying program than its current 1.1-trillion-euro ($1.2 -billion) quantitative-easing (QE) program, which spends 60 billion euros in newly printed money on government bonds every month and is curently scheduled to run until next September.

“Our asset purchase program continues to proceed smoothly,” Draghi said, adding that no one on the bank’s Governing Council had argued for it to be increased at present. But the “size, composition and duration” of the QE program could be changed, he said.

Bringing Greece in

Greece has so far not been admitted to the ECB’s QE program due to its low credit rating. But in the wake of its sweeping bailout agreement with creditors, it could be included under a waiver if it shows a commitment to reforms and the bailout program undergoes a review, Draghi said.

Draghi said real GDP in the single-currency area rose by 0.3 percent in the second quarter of 2015, lower than forecast in JuneThe bank now expects growth of 1.4 percent this year from 1.5 percent, while next year’s forecast has been reduced to 1.7 percent from 1.9 percent.

Inflation has also fallen short of projections, and the bank now expects a barely positive rate of 0.1 percent for this year, down from 0.3 percent previously, and 1.1 percent for 2016, down from 1.5 percent. Deflation fears had prompted the ECB to announce its QE program in January.

The ECB’s willingness to further increase QE spending contrasts with the US Fed, which is expected to move away from stimulus and potentially raise interest rates soon. Many analysts fear capital flight from Europe could result as investors seek a higher return on investment, causing European rates to rise in turn and dampening growth as borrowing becomes more expensive.

Draghi remained diplomatic, saying he normally does not comment on the actions of other central banks, but “if this is necessary to achieve the inflation objectives and more broadly the objectives of the Federal Reserve monetary policy, this is a plus for the world.”

sgb/uhe (AP, Reuters, AFP)

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