11 Apr 2014

Draghi to take action against deflation threat

Filed under: Business News

Borrowing costs could fall again within months, most economists believe.

European Central Bank governor Mario Draghi will probably take action within two months against the threat of deflation, a Bloomberg survey of economists said.

Almost two-thirds of respondents in the monthly survey now predict the ECB president will ease policy by June. Of those economists, just under half said he may implement multiple measures ranging from interest-rate cuts to asset purchases and long-term loans.

With euro-area inflation at the weakest in more than four years, Mr Draghi says he has “unanimous” backing from policymakers for unconventional measures if needed.

Even so, recent comments show officials haven’t yet agreed on which tools to use, setting them up for discussions on whether to take an unprecedented leap into quantitative easing (QE) or rely on smaller and more-targeted initiatives.

“The majority of ECB members don’t want to go down the large-scale asset-purchases route,” said Frederik Ducrozet, an economist at Credit Agricole CIB in Paris.

OPTIONS

“They’ll exhaust all the easier options they have before going to the bazooka of QE, and will see if they’re enough. And in the meantime, they’ll continue talking about QE.”

Mr Draghi is fighting to combat weakness in price pressures that threatens to undermine the euro area’s recovery.

Inflation in the 18-nation region climbed 0.5pc in March from a year earlier, the slowest pace since October 2009 and well below the ECB’s goal of just under 2pc.

Five of the 40 economists surveyed said the ECB will act on May 8 in Brussels, at one of the two monetary- policy meetings each year that the central bank holds outside its Frankfurt headquarters, and 20 said measures will be announced the following month. Six economists said the decision-making governing council won’t ease policy further.

The survey also signalled that economists see the ECB’s tolerance for low inflation waning. About half said officials will look through further declines in the headline rate as long as core inflation holds or rises, down from 76pc the previous month.

Mr Draghi said after the April 3 meeting, when he left the benchmark interest rate at 0.25pc, that the consumer-price gauge was distorted in March by one-time effects such as the timing of Easter and falling energy and food prices. Core inflation slowed to 0.8pc that month from 1pc in February. (Bloom-berg)

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