Mario Draghi, the European Central Bank president, strongly signaled Friday that he and his colleagues were preparing a new round of powerful monetary stimulus to jolt the flagging eurozone economy.
The remarks buoyed European stocks and bonds even before the Chinese central bank moved markets further on Friday by surprising investors with its first interest rate cut in two years.
While slowing growth was the reason for Beijing’s move, in Europe the big concern is a worrisomely low inflation rate that is both a symptom and cause of the 18-nation euro currency union’s inability to achieve any sustainable growth.
Speaking at a banking conference in Frankfurt, Germany, Draghi said the European Central Bank would “do what we must to raise inflation and inflation expectations as fast as possible.”
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If the bank’s current policies, which include some purchases of corporate bonds, do not end the threat, Draghi said, “we would step up the pressure and broaden even more the channels through which we intervene, by altering accordingly the size, pace and composition of our purchases.”
At issue is whether the European Central Bank will follow its peers around the world, including the Federal Reserve in the United States, the Bank of Japan and the Bank of England, in buying government bonds on a large scale, a policy known as quantitative easing.
With interest rates around most of the developed world having been effectively cut to as low as they can go, conventional monetary policy has reached its “zero lower bound.” Though there is no consensus on the effectiveness of quantitative easing, many economists point to the relatively strong British and American recoveries as evidence that it works.
The risk Draghi now runs is that unless the central bank’s actions keep pace with his words, he can lose credibility. Many economists have been pushing for most of this year for the central bank to take more aggressive stimulus steps, while Draghi in his monthly news conferences has been saying the equivalent of “stay tuned.”
If, after Friday’s statements, Draghi is unable to announce significant new measures when he and his governing council meet in early December, the financial markets could register their disappointment. Some analysts immediately predicted, though, that Draghi was simply trying to buy more time.