Draghi signals prospects for QE have increased

European Central Bank president Mario Draghi said he can not exclude the risk of deflation in the eurozone, in a sign that the likelihood of large-scale quantitative easing is increasing.

“The risk that we don’t fulfill our mandate of price stability is higher than it was six months ago,” Draghi said in an interview with German newspaper Handelsblatt. “We are in technical preparations to alter the size, speed, and composition of our measures at the beginning of 2015, should this become necessary, to react to a too-long period of low inflation. There’s unanimity in the ECB council on that.”

Draghi rarely gives media interviews and his comments reflect a drive to win over critics of quantitative easing in Germany, the eurozone’s largest economy.

The debate over whether fresh stimulus is needed has reopened a rift on the Governing Council, with Bundesbank president Jens Weidmann arguing that more stimulus is currently unwarranted while others warn too-low inflation expectations could become entrenched.

“Those traditional hawks who had wanted to stick to standard monetary-policy instruments in the wake of the worst financial crisis in 80 years have been proven wrong and wrong again,” said Holger Schmieding, chief economist at Berenberg Bank in London.

“Instead of inflation and moral hazard as the feared result of some non-standard policies, the eurozone is getting ever closer to deflation.”

The 25-member Governing Council will review a QE package at its monetary-policy meeting on January 22. An interim meeting will be held on January 7 — the same day that eurozone inflation data is published. A Bloomberg survey shows consumer prices probably slid 0.1% in December from a year earlier amid a slump in oil prices.

When asked about the probability of the region falling into deflation, or a spiral of declining prices that causes households to postpone spending, Draghi said “the risk cannot be entirely excluded, but it is limited”, and “we have to act against such risk”.

Asked how much the ECB might spend on government bonds, he answered that “it’s difficult to say”.

Weidmann said in an interview with the Frankfurter Allgemeine Sonntagszeitung newspaper on December 28 that cheaper oil is acting like an economic stimulus and there is no need to add monetary-policy measures on top. He also said the ECB must not bow to market pressure to start government-bond purchases.

Draghi said in December he is confident a stimulus programme can be designed to have consensus in the Governing Council, though unanimity isn’t necessary.

One stumbling block is how to share the risk of buying the bonds of stressed nations, according to Governing Council member Klaas Knot.

“As long as Europe isn’t politically willing to share more risks within the euro zone, it’s not up to us to take such a decision ourselves via the back door,” the Dutch central bank governor said in an interview with de Volkskrant newspaper this week.

In the Handelsblatt interview, Draghi said economic growth in the eurozone will remain weak unless European governments press ahead with reforms: “It is very clear that our monetary policy would be more effective if governments implemented structural reforms.”

* Bloomberg


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