The European Central Bank’s president, Mario
Draghi, fired off a salvo of measures yesterday aimed at strengthening the
eurozone’s tepid recovery – but ended up shooting down his own “bazooka” by
triggering turmoil in currency markets.
The ECB’s broader than expected package included
upping the size of its monthly €60bn (£47bn) money-printing programme by €20bn,
and expanding the scope of the scheme beyond government bonds to other assets.
The central bank also cut its main interest rate to
zero and lowered its deposit rate even further into negative territory at minus
0.4 per cent, in effect charging banks more to hold deposits with it. Four
long-term loan schemes were also announced, with banks given incentives to
boost credit growth with cheaper rates.
Mr Draghi is bidding to lift the inflation rate –
currently minus 0.2 per cent – and growth, which was just 0.3 per cent in the
latest quarter. The ECB was determined to avoid the disappointment over
its stimulus measures in December, treated as a damp squib by the market.
However, although the latest package unveiled by
the central bank chief initially sent the euro plunging against other major
currencies – with the benefits that implied in terms of boosting eurozone
exports and importing inflation – Mr Draghi reversed the sell-off in just one
sentence during his press conference.
His comments that “taking into account the support
of our measures to growth and inflation, we don’t anticipate that it will be
necessary to reduce rates further” sent dealers piling back into the single
currency. It ended up gaining ground against the pound and the dollar.
Simon Derrick, the chief currency strategist at BNY
Mellon, said: “If the intention of the ECB board was to help weaken the euro
then their work was entirely undone by Mr Draghi’s comments about the future
path of rates.”
Investec chief economist Philip Shaw said the
central banker had “shot down his own bazooka”, adding: “We judge Mr Draghi’s
comments on interest rate prospects to have been unhelpful, especially if
today’s market reaction is not unwound.”
The need for action, however, was underlined by the
ECB cutting its inflation forecast for this year to just 0.1 per cent, from 1.0
per cent. In its latest quarterly forecasts, it also suggested that inflation
would remain below its goal of just under 2 per cent over the coming years.
Mr Draghi said inflation would be low or negative
this year following tumbling commodity and energy prices, with the bank’s broad
package of measures designed to prevent “second-round effects” across the
eurozone such as falling wage demands.
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