ECB preparing to unleash unconventional monetary policy

April 12, 2014 8:33 pm

ECB preparing to unleash unconventional monetary policy

By Chris Giles in Washington and Claire Jones in Frankfurt / http://www.ft.com/intl/cms/s/0/62c7a688-c277-11e3-9370-00144feabdc0.html?siteedition=intl#axzz2ykY04Dri

Mario Draghi has signalled that the European Central Bank is getting ready to unleash new unconventional monetary policy in a bid to fight low inflation.

Speaking after the spring meetings of the International Monetary Fund in Washington on Saturday, the ECB president said the strengthening of the euro “requires further

His words came after he was pressurised all weekend over the dangers of allowing inflation to slide lower – by the IMF, finance ministers and central bank governors from all over the world.

European central bankers have also used the weekend’s meetings in Washington to press the message that if the ECB takes further action, it is more likely to cut interest rates, possibly into negative territory, than commence a quantitative easing programme.

In comments to journalists, Mr Draghi reiterated the ECB’s current economic forecasts which show a gradually recovering economy, but with stubbornly high unemployment that is pulling inflation lower.

Focusing on the exchange rate, he reiterated that the ECB does not have a target level for the euro, but its appreciation over the past year “was important for price stability”.

“The strengthening of the exchange rate would require – to make our monetary stance equally accommodative – further monetary policy accommodation,” Mr Draghi said, adding, “The strengthening of the exchange rate requires further monetary stimulus. That is an important dimension for us”.

The comments mark the latest attempt by Mr Draghi to talk down the euro.

But the single currency remains close to multiyear highs against the dollar despite increasingly dovish noises from the ECB president. It has risen 6 per cent against the dollar and 9 per cent against the yen in the past year.

Mr Draghi believes the euro’s strength is one of the main factors in the disinflationary trend in the currency bloc which has left inflation at close to a quarter of the central bank’s target. The ECB president believes the euro’s appreciation has knocked between 0.4 and 0.5 percentage points off inflation over the past 18 months.

Several members of the ECB’s governing council believe negative deposit rates, which effectively impose a tax on deposits parked at the central bank, are the best way to counter the strength of the single currency.

Jens Weidmann, Bundesbank president and the council’s arch hawk, said last month negative rates were the best defence against a strong euro, signalling he would support this ahead of QE. His comments echo those of Erkki Liikanen, Bank of Finland governor, and Sabine Lautenschläger, an ECB executive board member who recently joined from the Bundesbank.

Mr Draghi signalled earlier this month that the council will cut rates before launching any mass bond buying programme, often referred to as quantitative easing.

The Bundesbank is unlikely to support more policy easing until the ECB unveils a fresh forecast for inflation in June, but a lower-than-expected number for inflation this month could prompt action before then. It wants to be convinced that Europe’s undershooting of its “below but close to 2 per cent” inflation target will be breached for a prolonged period.

Inflation is expected to bounce this month to around 0.9 per cent, after falling to 0.5 per cent in March – its lowest level in more than four years.