MARIO Draghi signalled that the European Central Bank was prepared to launch a fresh round of monetary stimulus as soon as March, bolstering a recovery in US and European equities in the wake of heavy losses this year.
Speaking little more than a month after the bank last unleashed a round of stimulus, the ECB president said it would ‘review and possibly reconsider’ its monetary policy stance at its next meeting in six weeks.
“We are not surrendering in front of these global factors,” he said, referring to the China slowdown and the falling oil price that have destabilised global markets in recent weeks.
The ECB has ‘the power, the willingness, the determination to act’ and ‘there are no limits to our action’ to bring inflation up to its target of just below 2pc, he said. Policymakers, he said, would ‘absolutely reject’ attempts to derail their efforts to raise inflation ‘without undue delay’.
His comments spurred a rebound in US and eurozone equities, sending the S&P 500 up 1.4pc as it rallied after the worst start to a year in two decades. The pan-European Stoxx 600 index closed up nearly 2pc, alleviating a severe sell-off that had pushed it into bear market territory last week. The euro fell 1pc after Mr Draghi’s unexpectedly strong comments..
“Draghi is hammering home the message that more quantitative easing is on the table and market sentiment is shifting as a result,” said Michael Michaelides, European rates analyst at Royal Bank of Scotland. “That’s why you are seeing the rally across eurozone markets today (Friday).”
Hopes of imminent stimulus in the eurozone together with a slight rise in oil prices, to above $30/barrel, trimmed losses across equity and currency markets, helping the FTSE All-World index to escape bear market territory.
Germany’s five-year cost of borrowing hit a new low of minus 0.23pc as investors bet that the ECB had, in effect, committed to further easing, although there is scepticism over how much Mr Draghi will be able to deliver.
Just six weeks ago markets sold off after Mr Draghi underwhelmed investors with a smaller than expected stimulus package. “Today’s ECB meeting shows that Mario Draghi is always in for a good surprise,” said Carsten Brzeski, economist at ING-DiBa bank. “Even if the big question remains whether Draghi can actually make markets’ new dreams come true.”
Mr Draghi said the China-led slowdown in emerging markets and 40pc drop in oil prices since late last year would choke inflation in the eurozone in 2016. In December, ECB staff expected inflation of 1pc this year. The new outlook is almost certain to be lower.
The governing council kept its benchmark main refinancing rate and deposit rate unchanged at 0.05pc and minus 0.3pc respectively.
‘There are no limits to our action’ to bring inflation up to its target.
Published in Dawn, Business & Finance weekly, January 25th, 2016