Back
3 Apr 2014
ECB's Draghi signals QE could be used to fight stubborn low inflation
FXStreet (Łódź) - As widely expected, the ECB Governing Council decided to keep interest rates unchanged in April, despite the threat of deflation hovering over the Eurozone. ECB head Mario Draghi said during the subsequent press conference that various unconventional measures were considered during the monetary policy meeting.
Draghi said that the Governing Council saw inflation remaining at low levels for an extended period of time before it would gradually start rising towards the ECB's target. He attributed the steady fall in inflation since 2012 to the decrease in food and energy prices.
The CPI number in March were surprising and the April result could be uncertain due to the late Easter holiday, which increases demand for services, so the Governing Council is waiting for more data, the ECB chief said.
The Governing Council extensively discussed lowering the refinancing rate, introducing negative deposit rates as well as QE, Draghi revealed. The negative deposit rate was considered in context of maintaining price stability and not pushing down the exchange rate, which is an important factor but not a policy target. This comment pushed the euro down from from high above $1.38 to a low near $1.3740.
Furthermore, Draghi said that the Governing Council was unanimous in its commitment to using both conventional andunconventional instruments to fight low inflation, not just deflation.
Marc Chandler, Global Head of Currency Strategy deplored ECB's lack of action pointing out that even if “the ECB is correct and deflation does not materialize for the region as a whole, the persistence of lower than expected inflation and simply low inflation itself has a detrimental effect on investment decisions, growth, and the weight of the debt burden.”
Trevor Greetham Director of Asset Allocation and Portfolio Manager of Fidelity’s Multi Asset funds was also critical of ECB's announcement: “This is more monetary-policy-on-the-cheap. The aim is to talk down the euro without actually doing anything.”
Draghi said that the Governing Council saw inflation remaining at low levels for an extended period of time before it would gradually start rising towards the ECB's target. He attributed the steady fall in inflation since 2012 to the decrease in food and energy prices.
The CPI number in March were surprising and the April result could be uncertain due to the late Easter holiday, which increases demand for services, so the Governing Council is waiting for more data, the ECB chief said.
The Governing Council extensively discussed lowering the refinancing rate, introducing negative deposit rates as well as QE, Draghi revealed. The negative deposit rate was considered in context of maintaining price stability and not pushing down the exchange rate, which is an important factor but not a policy target. This comment pushed the euro down from from high above $1.38 to a low near $1.3740.
Furthermore, Draghi said that the Governing Council was unanimous in its commitment to using both conventional andunconventional instruments to fight low inflation, not just deflation.
Marc Chandler, Global Head of Currency Strategy deplored ECB's lack of action pointing out that even if “the ECB is correct and deflation does not materialize for the region as a whole, the persistence of lower than expected inflation and simply low inflation itself has a detrimental effect on investment decisions, growth, and the weight of the debt burden.”
Trevor Greetham Director of Asset Allocation and Portfolio Manager of Fidelity’s Multi Asset funds was also critical of ECB's announcement: “This is more monetary-policy-on-the-cheap. The aim is to talk down the euro without actually doing anything.”