Mario Draghi unveiled a revamp of quantitative easing and signaled officials might expand stimulus if the rout in financial markets continues to weigh on growth and inflation.
The European Central Bank president said in Frankfurt on Thursday that the Governing Council raised the share of bonds the ECB can buy to 33 percent of each issue from 25 percent, and that policy makers are ready to make more adjustments to ensure the full implementation of the 1.1 trillion-euro ($1.2 trillion) program. A weaker global outlook prompted an across-the-board reduction of the institution’s growth and consumer-price forecasts through 2017. The euro slid to a two-week low.
The reset of the ECB’s stimulus program after a six-month review gives officials more flexibility as they prepare to continue bond purchases until at least September 2016. Weaker commodity prices, slowing trade and volatility in global equities have fueled speculation that more stimulus is on the way.
“The issue limit by itself isn’t particularly significant, but the signal it sends is,” said James Nixon, head of forecasting for EMEA at Oxford Economics Ltd. in London. “It’s a clear signal to the market that they’re ready to do more. If the economy weakens further and inflation doesn’t come back as expected they’ll definitely extend the QE.”
Stimulus will continue until the end of September 2016 “or beyond, if necessary,” Draghi told reporters, in a tweak to language that hints more strongly than before at a readiness to prolong purchases.
“The information available indicates a continued, though somewhat weaker, economic recovery and a slower increase in inflation rates compared with earlier expectations,” he said. “Taking into account the most recent developments in oil prices and recent exchange rates, there are downside risks” to the latest inflation forecasts.
The euro dropped 1.1 percent to $1.1101 at 4:18 p.m. London time and touched $1.1087, its weakest level since Aug. 19. Government bonds rose across the region, with Portugal’s 10-year yield falling 11 basis points, the most in eight weeks.
While Draghi said it’s premature to pass judgment on whether “sharp fluctuations” in financial and commodity markets will have a lasting impact on inflation, he reiterated that for a sustained recovery in the region and a return of inflation to the ECB’s goal of just under 2 percent, the asset-purchase program must be fully implemented.
To achieve that, the ECB will buy more individual bonds, subject to “a case-by-case verification” that the central bank wouldn’t gain a blocking minority. In that case the issue share limit would remain at 25 percent, Draghi told reporters.
“I wouldn’t see this change in the issue limit as a huge thing but QE beyond September 2016 now looks increasingly likely,” said Holger Sandte, chief European analyst at Nordea Markets in Copenhagen. “We expected a dovish Draghi, indicating the willingness and readiness of the ECB to act, but he was as dovish as you can be without doing something.”
The ECB cut its outlook for inflation and growth for each year through 2017. Officials see consumer prices almost stagnant this year with an average increase of 0.1 percent. Draghi said inflation rates in the 19-nation region may drop below zero before accelerating to 1.1 percent in 2016 and 1.7 percent the following year.
“We may see negative numbers of inflation in the coming months: is that deflation?,” he said. “The Governing Council tends to think that these are transitory effects mostly due to oil-price effects. However, as I said before, we’ll closely monitor all incoming information and the Governing Council wanted to emphasize in the discussion we had today its willingness to act, its readiness to act and its capacity to act, its ability to act.”
The economy will grow 1.4 percent this year and accelerate to 1.8 percent in 2017, he said.
Policy makers expect to have “much more visibility” about the severity of China’s economic slowdown and any implications for the euro area after a meeting of Group of 20 finance ministers and central bankers in Ankara that starts Friday, according to Draghi.
“There aren’t special limits to the possibilities that the ECB has in gearing up monetary policy,” he said.
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