Mario Draghi primed investors for an initial bond-buying salvo on Monday as he signaled European Central Bank (ECB) officials are convinced they will succeed in choking off the threat of deflation.
Six years after the U.S. Federal Reserve began quantitative easing (QE), the ECB’s Governing Council committed to its first asset purchases next week in a program amounting to 60 billion euros (US$66 billion) a month. The ECB president also unveiled forecasts showing higher economic growth with an inflation outlook that puts officials on track to reach a goal of just below 2 percent.
“Our monetary policy decisions have worked, and it is with a certain degree of satisfaction that the Governing Council has acknowledged this,” he said at a press conference in the Cypriot capital of Nicosia on Thursday. “We see objectives are gradually being obtained.”
Draghi’s push to lead the 19-nation currency bloc into a new monetary-policy era by embarking on QE added to a range of prior stimulus measures that had so far failed to raise consumer prices in the region. Since June, the central bank has cut interest rates twice, offered cheap long-term loans for banks, and started buying asset-backed securities and covered bonds.
In his comments to journalists, Draghi revealed a range of elements of his stimulus plan, including to what extent the ECB may buy government bonds with negative yields.
“How negative can we go? Until the deposit rate,” he said. Policy makers left that rate at minus 0.2 percent on Thursday, with the benchmark rate at 0.05 percent.
Euro-area government bonds rallied after that remark. Portuguese 10-year securities jumped, pushing yields toward a record low, while Spanish, Italian, and German 10-year bonds also rose. German two-year notes declined, pushing their yield above the deposit rate for the first time since Feb. 6.
The Frankfurt-based institution now predicts consumer prices will stagnate this year before increasing 1.5 percent next year and 1.8 percent in 2017, Draghi said. Officials revised projections for economic growth, partly due to a drop in oil prices. The ECB sees gross domestic product expanding 1.5 percent this year, 1.9 percent in 2016, and 2.1 percent in 2017.
“Overall, the projections and the broader assessment of the economy are a signal of little inclination to add more stimulus,” Ken Wattret, an economist at BNP Paribas SA in London, said in a note to clients.
While reiterating that the “risks surrounding the economic outlook for the euro area remain on the downside,” Draghi also said they “have diminished following recent monetary policy decisions.”
Draghi’s satisfaction with an improvement of the economy follows his victory in pushing through government-bond purchases against the will of other policy makers such as Bundesbank President Jens Weidmann and Germany’s Executive Board member Sabine Lautenschlaeger.
The new ECB projections reflect “the favorable impact of lower oil prices, the weaker effective exchange rate of the euro, and the impact of the ECB’s recent monetary policy measure,” Draghi said, signaling that this was now the ECB’s last stimulus action and an improvement of the economic situation now depends on other actors.
Buying assets on a broad-based level was the “final set of measures,” the ECB President said. “In order to increase investment, boost job creation, and raise productivity, both the decisive implementation of product and labor market reforms and actions to improve the business environment for firms need to gain momentum in several countries.”
–With assistance from Zoe Schneeweiss, Catherine Bosley, Jana Randow, Alessandro Speciale and Angela Cullen in Frankfurt, Scott Hamilton and Jennifer Ryan in London and Jeff Black in Nicosia.