Draghi throws ECB door open to money printing as global prospects dim

Monday, 24 November 2014 00:00 - - {{hitsCtrl.values.hits}}

Reuters: European Central Bank President Mario Draghi threw the door wide open on Friday for more drastic measures to prevent the euro zone from sliding into deflation, promising to use whatever means necessary as China also acted to boost its sagging economic growth.

Mario Draghi, President of the European Central Bank (ECB) delivers his speech at the European Banking Congress in the Old Opera house in Frankfurt, 21 November With many fearing the euro zone could be heading for a Japanese-style lost decade of deflation and recession, Draghi’s remarks were reminiscent of when he pulled the bloc back from possible disintegration in 2012 by promising to do “whatever it takes” to back the common currency. Painting a bleak picture of the state of the 18 countries in the euro bloc, Draghi stressed that “excessively low” inflation had to be raised quickly. In a blunt message, he said there was now no sign of improvement in the months ahead and the ECB would pump more money into the euro bloc if its current measures fell short. “We will do what we must to raise inflation and inflation expectations as fast as possible,” he told an audience of bankers in Frankfurt. “If ... our policy is not effective enough to achieve this, or further risks to the inflation outlook materialise, we would step up the pressure and broaden even more the channels through which we intervene, by altering accordingly the size, pace and composition of our purchases,” he said. Annual euro zone inflation was 0.4% in October, far short of the ECB’s medium-term target of just below 2%. Draghi’s comments, which many read as inching very close to possible buying of government bonds, received a warm reception from Italian finance minister Pier Carlo Padoan, who said ECB action was welcome to revive economic growth in the euro zone. The ECB said on Friday it had started buying asset-backed securities. Along with purchases of covered bonds, a secure form of debt often backed by property, it is trying to encourage banks to lend and revive the economy. Draghi said earlier this week that if the current measures were not enough, or if inflation expectations deteriorated further, the ECB could widen its purchases to include debt of euro zone governments, a strategy which German policymakers strongly oppose. Economists expect bold ECB action. “Draghi all but announced that the central bank will step up monetary easing soon. Mr. Maybe has become Mr. Definitely,” said Nick Kounis of ABN Amro. But it is unclear how much such a move can help Europe as the prospects for the global economy and one of its chief engines of growth, China, grow ever more uncertain. China cut its benchmark interest rates for the first time in more than two years on Friday to stimulate economic growth, which is on track for its lowest annual rate in 24 years. Japanese Prime Minister Shinzo Abe has called snap elections, seeking a mandate for his struggling “Abenomics” revival strategy after the economy unexpectedly slipped into recession. The euro zone grew 0.2% in the third quarter, giving an annual rate of 0.8% , according to a flash estimate from the European statistical agency Eurostat. Of the major national economies, Italy has already fallen back into recession.

Creaking euro zone, China sound warnings for global growth

Reuters: Surveys sounded warning bells for the global economy on Thursday as euro zone businesses grew less quickly than any forecaster expected and China’s factories lost momentum. The downbeat data, alongside evidence of further price-cutting, will add to calls for more policy action from the European Central Bank, while the first drop in Chinese manufacturing output for six months will heap similar pressure on authorities in Beijing. “It does reinforce the case for quantitative easing from the European Central Bank,” said Alan Clarke, European economist at Scotiabank, of the euro zone PMIs. Markit’s Composite Flash Purchasing Managers’ Index for November, based on surveys of thousands of companies and seen as a good growth indicator, fell to 51.4, missing even the lowest forecast in a Reuters poll. The service industry PMI also undershot all forecasts by falling to 51.3, while the factory PMI’s dip to 50.4 missed consensus. However, all three readings held above the 50 mark that separates growth from contraction. Markit said the PMI pointed to 0.1-0.2% GDP growth in the euro zone in the current quarter, compared with the 0.2% forecast in a Reuters poll taken last week. “November’s fall in the euro zone composite PMI is a serious blow to hopes that the recovery would resume towards the end of the year,” said Jennifer McKeown, senior European economist at Capital Economics. Forward-looking indicators suggest the situation is unlikely to improve anytime soon. The composite new orders index fell below 50 for the first time since July 2013, and factories, which barely increased staffing levels, ran down old orders faster than last month. But likely of greatest concern for the ECB, which is facing the spectre of deflation, service firms cut prices they charge again, as they have done ever since late-2011. Euro zone prices rose 0.4% in October, well below the ECB’s target of just under 2% and stuck firmly in what it terms the inflation danger zone. To keep the region from slipping into deflation, the ECB has been pumping money into the banking system by buying covered bonds and offering cheap long-term loans to banks.