European Central Bank (ECB) chief Mario Draghi has predicted that economic growth and inflation are poised to gather strength in next two years as the bank embarks next Monday on its €1.1 trillion bond-buying scheme.
Making it clear that the ECB will continue buying sovereign bonds after September 2016 if need be, Mr Draghi said he expects the economic recovery in the euro zone to “broaden and strengthen”.
“The low level of the price of oil should continue to support households’ real disposable income and corporate profitability,” he said after ECB governors met in Nicosia.
“Domestic demand should also be further supported by our monetary policy measures, leading to ongoing improvements in financial conditions, as well as by the progress made in fiscal consolidation and structural reforms.
“Moreover, demand for euro area exports should benefit from improvements in price competitiveness and from the global recovery.”
His remarks triggered a rally in European shares, bringing their value to the highest level for more than seven years. The euro’s value dropped below $1.10, its weakest for more than 11½ years.
Bond-buying
While the bond-buying helps euro-zone governments, the weakening value of the single currency is a boon to European exporters.
As the ECB prepares to start spending €60 billion a month for 19 months on the bonds of euro-zone countries from Monday, its governors held the bank’s main interest rate steady at a record low of 0.05 per cent.
Concerned that the euro zone could plunge into a self-reinforcing deflationary cycle, the ECB governors overrode German objections in January to initiate the quantitative easing programme.
The euro zone encountered declining prices in January, with a negative inflation rate of minus 0.6 per cent. The rate of price decline eased in February to minus 0.3 per cent . The ECB now forecasts zero inflation for 2015, rising to 1.5 per cent in 2016 and 1.8 per cent in 2017.
Greece warning
Mr Draghi warned against any public communications in Greece that would undermine confidence in its commercial banks, which are beneficiaries of increasingly expensive emergency loans from the Greek central bank. “This is important: I’m saying this because if there is in place a certain communication that creates volatility in the markets, this communication destroys collateral, increases the spreads and . . . undermines the solvency of the Greek banking system,” he said.
The ECB governing council resolved at its meeting in Nicosia to give its blessing to the Greek central bank providing a further €500 million of emergency liquidity assistance to the country’s banks, taking the total to €68.8 billion.
