Draghi signals action over low inflation in euro zone

Euro weakens as ECB president says measures will be discussed at next rate meeting

Mario Draghi yesterday: the ECB president said the euro’s exchange rate was a cause for concern. Photograph: Reuters/Francois Lenoir

Mario Draghi yesterday: the ECB president said the euro’s exchange rate was a cause for concern. Photograph: Reuters/Francois Lenoir

Fri, May 9, 2014, 01:00

European equities and bonds strengthened yesterday and the euro weakened from a 2½ year high as European Central Bank president Mario Draghi signalled strongly that the bank will take action at its next rate- setting meeting in June.

Describing yesterday’s monthly rate-setting meeting as “a preview of the discussion we will have next month,” he added: “The governing council is comfortable with acting next time, but before we want to see the staff projections that will come out in the early June,”

His comments immediately sent the euro, which has been strengthening significantly in recent months, lower as markets anticipated some form of stimulus at the ECB’s next rate-setting meeting.

The 24-member council refrained from cutting interest rates yesterday or committing to any so-called “non-conventional” measures, despite persistently low inflation figures in the euro area.

‘Unanimous commitment’
But Mr Draghi said the council was “unanimous in its commitment” to using unconventional instruments within its mandate to cope with risks of a “too prolonged” period of low inflation. To date, the bank has refrained from engaging in the kind of quantitative easing measures adopted by other central banks, despite Mr Draghi’s pledge in September 2012 to do “whatever it takes” to save the single currency.

With the ECB president declining to specify what a “too prolonged” period would entail, analysts yesterday suggested that a bond-buying programme was still likely to be some way off, with a further interest rate cut more likely next month. That would be a boost to tracker mortgage holders.

Asked about the strength of the euro, which has been criticised by newly appointed French prime minister Manuel Valls as being excessively strong, Mr Draghi agreed that the exchange rate was a cause of concern.

“We had a discussion on the exchange rate. It’s not a policy target but certainly is very important for price stability and for growth. The strengthening of the exchange rate in the context of low inflation is a cause for serious concern in view of the governing council,” he said.

Weaker euro
France has called on the ECB to adopt unconventional policies to help weaken the euro, but the ECB has consistently argued that the management of exchange rates does not fall within its mandate.

Mr Draghi said the governing council had discussed the causes of the euro zone’s low inflation rate, which stood at 0.7 per cent last month, well below the ECB’s target of close to or below 2 per cent.

“If you take the first quarter of 2012 inflation at 2.7 percent, and you compare with the current inflation rate of 0.7 percent, of the 2 percentage points difference, 80 percent is due to lower energy and food prices,” Mr Draghi said, “but now the question is – and the question that we have to look at into – is whether there are other factors besides energy and food that could keep inflation low, and basically there are.”

These other factors included the exchange rate, weak domestic demand and weak employment figures, he said.

Asked about the recent resurgence in euro zone peripheral bonds, Mr Draghi said the “sizeable outflows” from other areas was the main reason for the buoyancy of the markets, noting that an estimated €160 billion had moved out of Russia.

Investors are “trying other jurisdictions to see whether there could be a better combination of risk and maturity,” he said.