ECB president Mario Draghi said the European Central Bank might start broad-based asset purchases if the inflation outlook worsens, as he prepares the ground for one of the most radical policies in the ECB's history.
“The objective here would not be to defend the current stance, but rather to increase meaningfully the degree of monetary accommodation,” the ECB president said in a speech in Amsterdam yesterday. “The governing council is committed – unanimously – to using both unconventional and conventional instruments to deal effectively with the risks of a too-prolonged period of low inflation,” he said.
Explicit undertaking
Mr Draghi's comments are his most explicit so far on what would prompt action similar to the quantitative easing programmes at the US Federal Reserve and the Bank of England.
Inflation data next week will give further clues as to whether consumer-price gains are accelerating as the economy recovers or if the euro area is teetering close to deflation.
"Draghi was very precise in explaining when and how the ECB will choose to act," said Johannes Gareis, an economist at Natixis in Frankfurt. "The ECB is unlikely to embark on broad- based asset purchases unless the ECB feels real deflationary risks."
Inflation in the 18-nation currency bloc slowed to 0.5 per cent last month, the weakest pace in more than four years and well below the ECB’s goal of just under 2 per cent. While that prompted Mr Draghi to say on April 3rd that policymakers are willing to use unconventional measures, including asset purchases, if needed, he also said the figure was depressed by temporary factors such as lower energy and food prices.
'Transmission mechanism'
"While inflation will remain low for a prolonged period, we see it gradually rising back to 2 per cent," Mr Draghi said. "The delay is largely explained by the impairments in the transmission mechanism that lengthen the lag between our accommodative policy stance and price developments."
Mr Draghi said that any asset-purchase programme “should certainly take into account the heterogeneity, the fragmentation let’s call it, of our euro area system, if that is relevant for the effectiveness of the purchase programme.”
His words echo comments made by executive board member Benoit Coeure on April 13th in Washington. Mr Coeure warned that "segmentation would have to be taken into consideration" to ensure a purchase programme in the euro area achieved a "homogeneous reduction" of longer-term interest rates. – (Bloomberg)
