The ECB is ready to launch unconventional measures. The board does not rule out a further easing of monetary policy and is "unanimous" in also considering the use of unconventional tools to counter the risks associated with too long a period of too low inflation rates. President Mario Draghi said so in today's press conference, stating that the Eurotower is ready to "act promptly". The further easing of monetary policy could also pass through quantitative easing, ie the purchase of financial securities. The Governing Council discussed this at the meeting as well as discussing a further cut in interest rates, a reduction in the overnight deposit rate of banks and extending unlimited volume supply for funding auctions. “The discussion was very broad and rich,” Draghi said, specifying that the conventional measures are not exhausted. Today's board left rates unchanged at 0,25%, the all-time low, and also decided to leave the marginal rate unchanged at 0,75% and that on deposits at zero.
Draghi also pointed out that our institutional structure is different from the USA where the effect of Qe is immediate and direct on credit because most of the credit flows to the real economy through the capital market. On the contrary, in Europe credit goes through the banks and we must also take this into consideration when assessing the effects of Qe. An efficient banking market is more important in Europe than in the US, Draghi explained, and for this reason the asset quality review of European banks is crucial to restore confidence. “The eurozone cannot return to real growth without a healthy banking sector,” Draghi said.
However, there are several options on how to do Qe. “There are obviously various preferences on which type of quantitative easing is more effective. We will continue to work on it in the coming weeks,” Draghi said when asked about which financial stocks he could buy. Draghi focused on the possibility of buying private debts, which in a bank-centric system such as the Eurozone belong to credit institutions. We need, he said, to relaunch ABS, securities backed by assets such as mortgages and loans, a market frozen after the 2007 crisis and which requires a review of the legislation, which at the moment does not distinguish between simple ABS, the more reliable ones, and highly structured products. On this point, Draghi said, “the ECB will present a paper together with the Bank of England at the next meetings of the International Monetary Fund”.
On the price front, the ECB does not see "an increase in risks" that could lead to deflation. According to the Eurotower, the current low inflation is largely due to external factors, with 70% attributable to energy and food prices and a recovery is expected in April of inflation on a harmonized basis, after 0,5% in March, taking into account of price volatility during the Easter period. Inflation is expected to remain “low” throughout the year, before climbing back to levels closer to 2% next year. The Eurotower thus confirms the prediction of a "prolonged period of low inflation" followed by a normalisation.
However, Draghi added that "it is quite obvious that the Governing Council is examining this period of low inflation: the longer it lasts, the more risks there are for inflation expectations in the medium and long term". A situation, that of Europe, which Draghi reiterated is different from the deflation encountered by Japan and on which "there are no risks at the moment", but "this does not mean that the council should remain indifferent". That's because, she explained, "you can think you have zero inflation when in fact you're already in deflation."
For Draghi it is therefore necessary to act in advance. "My big fear for the eurozone economy is a protracted period of stagnation longer than what we anticipate in our baseline scenario," Draghi said, noting that unemployment remains very high. “Already today – explained Draghi – the situation of stagnation in the Eurozone is serious and unemployment levels, even if in the process of stabilising, are very high and the longer they remain at these levels the more they will start to become structural and, therefore, very more difficult to bring down through conventional policy measures”. According to Draghi, structural reforms are very important against the outburst".
The ECB noted that "the recovery in the eurozone continues at a moderate pace, as can be seen from the available data" and that "geopolitical risks have the potential to negatively affect" the eurozone economy. At the end of the press conference, Draghi also replied to the IMF who yesterday urged the ECB to take new measures: he is "very generous" with his advice, commented the president of the ECB.
Spread and Stock market reacted well to the words by Draghi: the Ftse Mib accelerated upwards, +1,33%, and the spread fell to 167 points and the 3,26-year Treasury rate fell to XNUMX%.
