THE EUROPEAN Central Bank (ECB) gave the clearest signal yet of even further monetary easing yesterday, prompting a rapid drop in the euro.
ECB president Mario Draghi said that the institution is now “comfortable with acting next time”, following his staff’s latest projections of the economic climate, which will be published early in June. The comment was unusually open in comparison to the ECB’s usual reticence to commit to future decisions.
Many analysts are now indicating that the ECB will cut rates at the least, perhaps driving the deposit rate to negative levels. “Bolder policy action, perhaps including asset purchases, should not be far off,” said Jennifer McKeown of Capital Economics.
The euro had risen against the dollar on the initial announcement that there would be no action this month, up to the highest level in two and a half years, just shy of $1.40.
Draghi’s comments sent the currency to below $1.384 in the aftermath. Draghi added that the longer inflation stayed low, the larger the risks would be to the Eurozone’s economies, adding “there is a consensus in not being resigned to this and accepting this as a fact of nature.
Currently, inflation in the Eurozone is running at 0.7 per cent, far below the ECB’s medium-term target of close to buy just shy of two per cent.
The call to action sent Spain’s 10-year bond yields to just above 2.9 per cent, the lowest on record for the country – yields on the same securities were over six per cent for much of 2012.
However, Berenberg’s Holger Schmieding expressed scepticism at the likely effect of further action: “If the ECB were to act in June, would it make a big difference? Probably not. We maintain our view that broadbased quantitative easing (QE) including massive purchases of sovereign bonds is unlikely.”
He added: “Unless the ECB were to surprise markets with full-scale QE, the ECB decision in June (nothing or just small stuff) will likely herald a modest rebound rather than a further fall in benchmark yields in the Eurozone.”