“Some have wondered how consumers, bankers, and MBS investors around the developed world could rationally think pre-crisis home prices would continue to rise. The public words and deeds of their Central Bankers (of the E.U. and U.S.) make abundantly clear that THEY are the ones responsible for creating and ingraining long-term, rational expectations of monetary inflation in the prices of goods, services, and assets; such as stocks, bonds, and homes.”, Mike Perry

International Business

Mario Draghi Says E.C.B. Will ‘Do What We Must’ to Stoke Inflation


Mario Draghi, head of the European Central Bank, said on Friday that he planned new stimulus. Credit Michael Probst/Associated Press

PARIS — Mario Draghi, the European Central Bank president, strongly signaled on Friday that he and his colleagues were preparing a new round of powerful monetary stimulus to jolt the flagging eurozone economy.

The remarks buoyed European stocks and bonds even before the Chinese central bank moved markets further on Friday by surprising investors with its first interest rate cut in two years.

While slowing growth was the reason for Beijing’s move, in Europe the big concern is a worrisomely low inflation rate that is both a symptom and cause of the 18-nation euro currency union’s inability to achieve any sustainable growth at all.

Speaking at a banking conference in Frankfurt, Mr. Draghi said the European Central Bank would “do what we must to raise inflation and inflation expectations as fast as possible.”

If the bank’s current policies, which include some purchases of corporate bonds, do not end the threat, Mr. Draghi said, “we would step up the pressure and broaden even more the channels through which we intervene, by altering accordingly the size, pace and composition of our purchases.”

The blunt call was reminiscent of a speech Mr. Draghi gave in July 2012, when he said the central bank “is ready to do whatever it takes to preserve the euro,” an assertion that has been widely credited with having helped to ease the sovereign debt crisis.

At issue is whether the European Central Bank will follow its peers around the world, including the Federal Reserve in the United States, the Bank of Japan and the Bank of England, in buying government bonds on a large scale, a policy known as quantitative easing.

With interest rates around most of the developed world having been effectively cut to as low as they can go, conventional monetary policy has reached its “zero lower bound.” While there is no consensus on the effectiveness of quantitative easing, many economists point to the relatively strong British and American recoveries as evidence that it works.

While Mr. Draghi on Friday did not actually say much that was different from previous utterances, there was a significant new emphasis on the risk of deflation in the eurozone. He warned that the “inflation situation in the euro area has also become increasingly challenging.” The word “inflation” appeared 45 times in the text of his speech on Friday.

The risk Mr. Draghi now runs is that unless the central bank’s actions keep pace with his words, he can lose credibility. Many economists have been pushing for most of this year for the central bank to take more aggressive stimulus steps, while Mr. Draghi in his monthly news conferences has been saying the equivalent of “stay tuned.”

If, after Friday’s statements, Mr. Draghi is unable to announce significant new measures when he and his governing council meet in early December, the financial markets could register their disappointment. Some analysts immediately predicted, though, that Mr. Draghi was simply trying to buy more time.

Mr. Draghi will find himself even more on the spot at the December meeting if a closely watched report on eurozone inflation next week shows prices falling further.

Mr. Draghi spoke Friday as the world’s central banks are increasingly concerned that very low inflation will tip into outright deflation — a self-reinforcing condition in which consumers and businesses put off purchases and investments in the expectation that prices will fall. Deflation can also crush fragile borrowers by raising the real interest rate on their loans, which would load weak banks with a new round of defaults on loans.

Eurozone consumer prices rose just 0.4 percent in October, far below the central bank’s target of close to but less than 2 percent. In fact, some member states have already begun to experience deflation. Mr. Draghi and his peers are afraid that consumers and investors will increasingly see low inflation as the new normal, creating a self-fulfilling prophecy.

The European Central Bank in September cut its main interest rate target to a rock-bottom 0.05 percent, and reduced its deposit rate to minus 0.2 percent, effectively charging banks for leaving unused funds at the central bank. The bank has been buying private-sector loan assets since early October. And it has announced longer-term low-interest loans to banks in an effort to restart lending.

So far, that has not been enough. Recently, Mr. Draghi has said the central bank intends to expand the size of its balance sheet — that is, to inject money into the market — by 1 trillion euros, or about $1.25 trillion. Economists say the current measures fall far short of what is needed to hit that level.

Michel Martinez, chief eurozone economist with Société Générale, noted that Mr. Draghi had not provided much detail about his inflation-fighting plans. Mr. Martinez said he expected the central bank to increase its purchases of private-sector assets, including packages of housing loans known as covered bonds, as well as of debt issued by agencies like the European Investment Bank.

“But when you do the math, you make a rough assumption that the E.C.B. takes 20 percent of all those available assets,” Mr. Martinez said. “That’s barely €400 billion.”

If Mr. Draghi is going to hit his target, Mr. Martinez added, “obviously the answer is to purchase government bonds.”

Expectations that the central bank will increase the supply of euros in the market led investors to sell the European currency in favor of dollars, particularly as the Federal Reserve has begun reining in its own bond-buying. The euro fell about 1 percent to $1.2438 in afternoon trading. The Euro Stoxx 50 index gained 2.97 percent. Yields on Spanish and Italian 10-year bonds fell roughly 1 percent.

Mr. Draghi also acknowledged that weak growth had contributed to the risk of deflation. The economy of the 18-nation euro currency bloc largely has largely stagnated since April, and a private-sector survey of purchasing managers on Thursday showed more signs of deceleration. The poor labor market has kept consumer demand suppressed.

And yet, the path to employing wholesale bond-buying is not an easy one. There is significant opposition to such a policy in Germany, for example, and even if the political hurdles are overcome, economists say they wonder whether the eurozone — in which each country, rather than the bloc as a whole, issues bonds — is the appropriate venue for quantitative easing.

Two of Germany’s gatekeepers on the question of quantitative easing — the government’s finance minister, Wolfgang Schäuble, and the German central bank’s president, Jens Weidmann — addressed the same conference on Friday but declined to comment on Mr. Draghi’s speech.

In any case, Mr. Martinez said he was not convinced that Mr. Draghi was ready to act in the near term, perhaps not before next summer.

“The E.C.B. is buying time in the hope that the outlook improves,” he said.

Guntram B. Wolff, who follows the European economy as director of the Brussels-based research institute Bruegel, agreed.

“My take is that it will still take some time before” Mr. Draghi commits to buying government bonds, Mr. Wolff said. “My sense is that the German government is moving toward the position that this may have to happen at some point to prevent a catastrophe in terms of prolonged low inflation or even deflation. It has serious implications for Germany, too.”

A version of this article appears in print on November 22, 2014, on page B7 of the New York edition with the headline: Mario Draghi Says E.C.B. Will ‘Do What We Must’ to Stoke Inflation.

Posted on November 24, 2014, in Postings. Bookmark the permalink. Leave a comment.

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