ECB ready to act, says Draghi, as shares move higher on stimulus hopes

 

The euro zone will need “a strong effort” from all its policymakers if it is to overcome the “significant challenges” that global markets have thrown down over the past few weeks, Mario Draghi the head of the European Central Bank (ECB) told the region’s lawmakers Monday.

Draghi set a dovish tone when he addressed European lawmakers. In his opening remarks he confirmed the ECB “will not hesitate to act” if there were downward risks to price stability from low commodity prices and/or transmission issues.

In the Q&A session, Draghi also reinforced his view that current policies are effective and are working. There was the usual line that the ECB still has plenty of instruments and the asset purchase programme (APP), or QE as its more commonly known, and is flexible enough to be adjusted to changes in the European economy and markets. He added that the ECB also have other instruments aside from APP, which may be a reference to a lower deposit rate.

“The focus of our deliberations will be two fold,” Draghi said. “First, we will examine the strength of the pass-through of low imported inflation to domestic wage and price formation and to inflation expectations. This will depend on the size and the persistence of the fall in oil and commodity prices and the incidence of second-round effects on domestic wages and prices. Second, in the light of the recent financial turmoil, we will analyse the state of transmission of our monetary impulses by the financial system and in particular by banks. If either of these two factors entail downward risks to price stability, we will not hesitate to act.”

Yesterday, following Draghi’s comments, Eonia (Euro Overnight Index average) forwards were pricing a further cut in the ECB deposit rate of 12 basis points at the March meeting. Eonia, is an effective overnight interest rate computed as a weighted average of all overnight unsecured lending transactions in the interbank market in euros. It was initiated within the euro area by the contributing panel banks. Eonia forwards now imply a fixing of -36bps in March and an additional -10bps after the September meeting, indicating very little optimism from ECB actions over the remainder of this year.

Lastly, Draghi also touched on the possibility of Brexit. He said negotiations later this week within the EU should be “to anchor the UK in the EU, and having the EU and the UK working together” adding “Both have to benefit. Both have to draw benefit.”

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