Draghi ready to strengthen QE

Mario Draghi was in “whatever it takes” mode on Thursday (September 3rd), as he gave a strong signal yet that quantitative easing (QE) could be stepped up if global market shocks threaten recovery in the eurozone.

The European Central Bank (ECB) stands ready to expand the “size, composition and duration” of its €1.1 trillion bond-buying programme should the need arise, he told reporters assembled in Frankfurt after the bank’s six-weekly policy meeting. The ECB further signalled its readiness to act by raising the purchase limit of a single country’s debt stock from 25 to 33 per cent.

After setting out downgrades to the bank’s forecasts for inflation and growth, Mr Draghi warned about the heightened downside risks facing the eurozone.

The ECB revised its GDP growth and inflation down to 1.4 per cent and 0.2 per cent respectively for 2015. Looking to next year, it forecasts growth to hit 1.7 per cent and inflation at 1.1 per cent.

“The information available indicates a continued, though somewhat weaker economic recovery and a slower increase in inflation rates compared with earlier expectations,” said Mr Draghi. “More recently, renewed downside risks have emerged to the outlook for growth and inflation.”

As he spoke the euro tumbled by one per cent against the US dollar and fell to a 15-month low versus the yen, while euro area bond yields fell and stocks rallied.

Inflation

Eurozone inflation was just 0.2 per cent in August, unchanged from the previous two months and reflecting a further decline in energy prices. The ECB’s target is two per cent.

While the bank expects price growth to pick up, Mr Draghi warned that the current projections were only accurate up to August 12th, before the recent market turmoil.

“The events that took place since then are a downside risk to the projections themselves,” he said. “Furthermore, financing conditions, especially in the last two weeks and even before, have tightened.”

According to Mr Draghi, lower commodity prices, a stronger euro, and lower growth, have “increased the risk to a sustainable path of inflation towards” the two per cent target.

Growth

Eurozone growth is also looking shaky. Real GDP in the euro area rose by just 0.3 per cent in the second quarter of 2015, lower than previously expected. The latest indicators point to a broadly similar pace of growth in the second half of this year.

“The risks to the euro area growth outlook remain on the downside, reflecting, in particular, the heightened uncertainties related to the external environment,” said Mr Draghi. “Notably, current developments in emerging market economies have the potential to further affect global growth adversely via trade and confidence effects.”

Slowing growth in China was cited as a key risk to eurozone growth. The effects of Beijing’s devaluation of the yuan, coupled with stock market routs, are also posing problems.

“We are observing a weakening of the prospects for the Chinese economy,” said Mr Draghi, noting that this has an effect on trade and on broader confidence.

Oil is also on the ECB’s radar and Mr Draghi views this as the main cause of low inflation. While the bank is happy that lower fuel prices mean more disposable household income, there are concerns that weak demand is a sign of slowing global growth.

“When oil prices are lower because of demand effects, then we have to consider also the negative impact that lower growth in emerging market economies might have on the growth of the euro area,” he said.

A beefed up QE programme is now on the table, but for the moment the bank will proceed with its monthly asset purchases of €60 billion.