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Draghi’s speech underlines euro zone’s inflation worries and hints at more easing

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Nov 20, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Mumbai) - Draghi’s speech underline euro zone’s inflation worries and hint at more easing
    Speaking at the European Banking Congress in Frankfurt , ECB supremo Mario Draghi mentioned ECB’s growing concern that the rate of inflation in euro area, currently 0.1%, is slipping further from their target of close to under 2 per cent. He said the central bank will do everything necessary to ensure that inflation returns rapidly toward the goal of just under 2%, president. “If we decide that the current trajectory of our policy is not sufficient to achieve that objective, we will do what we must to raise inflation as quickly as possible”.

    Inflation in the euro zone is slipping fast depressed by a high degree of slack in the economy and low oil prices. Policy makers are considering various measures such as expansion to the €1.1 trillion ($1.2 trillion) quantitative-easing program taking the deposit rate further below zero, to inject more money into the economy.

    Drafgi noted that core inflation, which excludes energy and food has remained too weak. Low core inflation, according to Draghi has been in the past a good forecaster for where inflation will stabilize in the medium-term. He believes that an increase in core services inflation will depend on rising nominal wage growth and there is an urgent need for the economy to move back to full capacity as quickly as possible.

    Draghi hinted at rate cut and QE change

    Draghi considers the asset purchase programme to be a powerful and flexible instrument to achieve expansionary stance as it can be adjusted conveniently in terms of size and composition or duration. He stressed again on the possibility of expanding the 1.1 trillion (£770bn) quantitative easing (QE) programme by either increasing its size, or by extending its time frame beyond September 2016.

    Draghi also added that the interest rate on the deposit facility “can empower the transmission” of asset purchases, “not least by increasing the velocity of circulation of bank reserves.”

    The ECB’s intent to further ease monetary policy has been opposed in Germany, where its economic council said QE ‘risked creating a financial boom and bust’.

    Euro drops at Draghi’s hint to ease monetary policy

    Hints that the ECB will further ease monetary policy have affected the euro/dollar exchange rate as it comes at a time when the US Federal Reserve is preparing to hike interest rates for the first time in a decade.

    Draghi’s dovish tone caused the euro to fall further against the dollar. The euro moved towards month lows today falling into a session low of $1.0663. It was down 0.6 per cent on the day extending further its decline from the erstwhile 0.4 per cent.
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