ECB’s Draghi hints at more stimulus
“The first weeks of this year have shown that the euro area and the union at large face significant challenges.” Mario Draghi
European Central Bank President Mario Draghi said Monday the ECB is “ready to do its part” to spur more growth, further stoking speculation policymakers will step up their stimulus program next month.
If the eurozone’s already meager inflation weakens further, “we will not hesitate to act,” Draghi said in testimony before the European Parliament’s economic and monetary affairs committee.
European stocks rallied on the news, and U.S. markets could follow Tuesday when they reopen after closing for the Presidents Day holiday.
IHS economist Howard Archer said Draghi’s remarks help solidify his projection the ECB will further cut its deposit rate for banks to -0.4% from -0.3% at a March 10 meeting. The negative rate means banks are paying for the ECB to hold their money instead of drawing interest, a strategy largely aimed at spurring more bank lending.
Archer also wrote in a note to clients the ECB “could very well step up its monthly purchase” of government bonds and other assets by 20 billion to 30 billion euros ($22.3 billion to $33.5 billion) from the current 60 billion euros ($67 billion). The bond purchases, which began in early 2015 and are expected to total 1.1 trillion euros ($1.2 trillion) through September 2016, are aimed at pushing down long-term interest rates.
Draghi told European lawmakers: “The first weeks of this year have shown that the euro area and the union at large face significant challenges.”
The sharp fall in oil and other commodity prices, he noted, has kept inflation feeble. The plunge in commodities also has hurt the emerging markets that export them, hammering stocks, particularly those of banks that have lent to the emerging economies.
“A general deterioration in market sentiment has taken root and has gathered pace over the last week,” Draghi said.
The drop in bank stocks, he said, was accentuated by perceptions banks “may have to do more to adjust their business models” to reflect lower growth and increased requirements to hold more capital after the financial crisis. He added the tougher capital requirements have put the banks on more solid footing.
Yet the stock sell-off could further cut bank lending, which Archer said fell sharply in December. Some banks, he noted, are especially vulnerable because they have elevated levels of loans that are delinquent or in default.
If the drop in commodity prices or banks’ worsening financial health “entailed downward risks to price stability, we will not hesitate to act,” Draghi said.
Annual inflation in the eurozone rose to a 15-month high of 0.4% in January, Archer noted, but that’s still meager. Low inflation poses the risk of deflation, or falling wages and prices, which can cause consumers to put off purchases and further weaken growth.
The eurozone’s economy grew just 0.3% in the fourth quarter at an annual rate and 1.5% in 2015.