From
Send to

Draghi sees deflation risk as ECB prepares fresh stimulus

Jan. 4, 2015 - 21:32 By Korea Herald
Euro notes. (Bloomberg)
Mario Draghi gave his strongest signal yet that the European Central Bank is likely to start large-scale government-bond purchases by saying he can’t rule out deflation in the euro area.

The ECB president seldom gives interviews and his comments to the German newspaper Handelsblatt reflect a drive to win over that nation. Policy makers there have led criticism of quantitative easing, saying it threatens financial stability, reduces the incentive for governments to restructure their economies, and is legally tricky.

“The risk cannot be entirely excluded, but it is limited,” Draghi said when asked if the region could enter a spiral of declining prices, falling wages and postponed spending. “We have to act against such risk.”

While Bundesbank President Jens Weidmann has argued that more action is unwarranted as slumping oil costs provide an economic stimulus, others have warned that the drop in crude prices could tip the currency bloc into full-fledged deflation. Data next week is forecast in a Bloomberg survey to show euro-area consumer prices dropped 0.1 percent in December from a year earlier, the first decline since 2009.

“Traditional hawks who had wanted to stick to standard monetary-policy instruments in the wake of the worst financial crisis in 80 years have been proven wrong and wrong again,” said Holger Schmieding, chief economist at Berenberg Bank in London. “Instead of inflation and moral hazard as the feared result of some non-standard policies, the eurozone is getting ever closer to deflation.”

The single currency dropped to the weakest level in more than four years and bond yields slid to a record low as investors bet that QE will start as soon as this quarter. The euro was down 0.6 percent to $1.2034 at 2:23 p.m. Frankfurt time. The yield on 10-year Spanish government debt fell 7 basis points to 1.54 percent.

“We are in technical preparations to alter the size, speed and composition of our measures at the beginning of 2015, should this become necessary, to react to a too-long period of low inflation,” Draghi said in the interview. “There’s unanimity in the ECB council on that.”

The 25-member Governing Council will review a QE package at its next monetary-policy meeting on Jan. 22. An interim meeting will be held on Jan. 7 ― the same day the euro-area inflation data are published.

“The risk that we don’t fulfill our mandate of price stability is higher than it was six months ago,” Draghi said. Asked how much the ECB might spend on government bonds, he answered that “it’s difficult to say.”

The QE battle is being fought partly in the pages of German media. Peter Praet, the ECB’s chief economist, told Boersen-Zeitung last week that officials can’t look through the drop in oil prices as the risk of second-round effects is “higher than usual.” Vice President Vitor Constancio told WirtschaftsWoche last month that the ECB wants to prevent a “dangerous vicious circle of declining prices, rising real wage costs, falling profits, shrinking demand and further declining prices.” (Bloomberg)