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Draghi sees need to review monetary policy as downside risks increase

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Jan 21, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    FXStreet (Mumbai) - The European Central Bank (ECB) today kept its monetary policy unchanged. Rates were held steady at 0.05 per cent and at the post meeting press conference ECB supremo Mario Draghi stated that rates can be expected to "stay at present or lower levels for an extended period of time". He held that there that downside risks were increasing again. He signalled the need for more stimulus measures and that monetary policy stance will be reassessed in its next meeting on the back of rising downside risks. He noted "It will therefore be necessary to review and possibly reconsider our monetary policy stance at our next meeting in March".

    Defending December’s stimulus package which some investors thought was not enough Draghi said the policy measures were "entirely appropriate and effective" given the conditions that were prevailing then. In December the ECB had slashed deposit rate, extended QE to March 2017 and expanded it to buy chiefly government bonds and also decided to reinvest the principal payments on the securities purchased to support liquidity conditions. He highlighted the change that has come about post its December meeting owing to sharp decline in oil price which has fallen 40 per cent since then.

    Draghi observed that the volatility in financial and commodity markets and the geo-political crisis will keep posing threat to euro area growth. A combination of factors such as equity market slump, widening of credit spreads, further drop in inflation outlook and the strengthening of the euro against some major currencies will likely raise the pressure on the ECB to ease soon.
    "Events of the past six weeks have certainly increased the chances of the ECB eventually providing more policy support. The plunge in the oil price to below $30 per barrel means that CPI inflation could average as little as 0.2 percent this year – well below the ECB's current forecast of 1 per cent”, he added.

    The central bank expects inflation to remain at very low or negative levels in the coming months. It will pick up only later in 2016. The fall in oil prices coupled with the slowdown in emerging markets led by China will continue to keep prices in check thereby hurting inflation which has stayed too low for a long time now. Given the current scenario, the ECB looks likely to revise down inflation projections in March from the current level of 1 per cent for 2016 and 1.6 per cent for 2017.

    He expressed concern over the poor inflation outlook and signalled that more quantitative easing might be in store when the central bank meets in March. He also added “There are no limits to how far we can deploy our instruments within our mandate,” said Mr Draghi. However, he did no specifically say what those easing instruments would be. Draghi asked the markets should not doubt that the central bank is ready to act. He reiterated that the ECB has the “power, willingness and determination to act” to move inflation up to its 2 per cent target.

    Draghi’s hint at the possibility of further easing caused a sharp movement in in both equity and currency market. The euro dropped 0.6 per cent versus the dollar, falling below the $1.08 level. US stocks also rallied with Dow futures rising more than 115 points.
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