Draghi Suggest More Monetary Easing If Growth Weakens in Euro Area

draghiECB President Mario Draghi has suggested that more monetary easing could occur if the economies in the 18 member euro currency union continue to struggle.

During his introduction speech to the press, Draghi said that the ECB would leave interest rates unchanged, as most expected ,and then explained that the ECB started purchasing 2 year covered bonds and asset-backed securities from mortgages and public sector loans.

Although the ECB began purchasing covered bonds in October, the central bank has not undertaken the same type of bond purchasing of government debt that was taken by the U.S. Federal Reserve, Bank of Japan, and Bank of England through quantitative easing.

With quantitative easing, a central bank purchases government bonds from private sector companies or institutions such as banks. The increased demand for government bonds drives up their value, making them more expensive to buy, and a less attractive investment.

The companies who sold the bonds may use the proceeds to invest in other companies or lend to other individuals in the economy rather than buying more of the bonds. It is hoped that this will make a simulative impact in the economy.

As inflation levels fall across the euro area economies, the threat of deflation lingers.

Draghi said that the ECB is watching inflation in the euro area and acknowledged that weak inflation is partly due to the drop in oil prices.

“We will also evaluate the broader impact of recent oil price developments on medium-term inflation trends in the euro area. Should it become necessary to further address risks of too prolonged a period of low inflation, the Governing Council remains unanimous in its commitment to using additional unconventional instruments within its mandate” Draghi said in his statement.

Later Draghi admitted “We will be particularly vigilant as regards the broader impact of recent oil price developments on medium-term inflation trends.”

GDP growth forecasts in the 18 member currency union were revised substantially downwards since the last meeting in September.

Downward revisions were made for domestic demand and net exports. The ECB forecasts annual real GDP increasing by 0.8 percent in 2014, 1.0 percent in 2015, and 1.5 percent in 2016.

Inflation forecasts are 0.6 percent for 2014, 1.1 percent for 2015, 1.4 percent for 2016.

“The risks surrounding the economic outlook for the euro area are on the downside. In particular, the weak euro area growth momentum, alongside high geopolitical risks, has the potential to dampen confidence and especially private investment” Draghi said.

“In addition, insufficient progress in structural reforms in euro area countries constitutes a key downward risk to the economic outlook” Draghi added.

-Johnathan Schweitzer

 

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