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ECB keeps rates low amid talk of QE
April 3, 2014, 9:52 pm

In a surprise move, Draghi said that the ECB did discuss quantitative easing as a means to boost eurozone economies [Xinhua]

In a surprise move, Draghi said that the ECB did discuss quantitative easing as a means to boost eurozone economies [Xinhua]

The European Central Bank maintained interest rates at 0.25 per cent, largely meeting analysts’ forecasts, but its president Mario Draghi sounded a cautionary note about very low inflation data throughout the 18-member eurozone.

The ECB has always said that its target inflation for the zone is 2 per cent. However, recent data has the average at 0.5 per cent, and the bank says that low inflation – or deflation – can postpone growth as consumers wait for bargain prices for goods and services.

Last week, Germany’s Der Spiegel magazine speculated that the ECB may take drastic action regarding the low inflation rates and the historically low interest rates.

On Thursday, Draghi commented about the low inflation rates saying that “over the medium to long term” they “continue to be firmly anchored.”

He also said that with unemployment in the eurozone much too high – in some countries like Spain and Greece it is over 20 per cent – and the euro trading at just under 1.38 against the dollar, economic prospects for Europe were at risk of being on the downside.

But in an unexpected move, Draghi indicated that the ECB could consider establishing a stimulus programm – also known as quantitative easing.

“The Governing Council is unanimous in its commitment to using all unconventional instruments within its mandate in order to cope effectively with risks of a too-prolonged period of low inflation,” he said.

“There was a discussion of [Quantitative Easing] QE. It was not neglected in what was a rich and ample discussion,” he told reporters.

In a bid to increase liquidity (monetary supply) and promote lending – in particular when interest rates near rock-bottom levels but fail to revitalize the economy – Central Banks can resort to quantitative easing by flooding financial institutions with capital.

In 2009, the US Federal Reserve launched an $85-billion bond-buyback programme to generate stimulus in the economy following the sub-prime mortgage crisis which led the world into recession.

The Fed had stipulated that it would begin to phase out its programme – which also included keeping interest rates very low – only when unemployment fell below 7 per cent.

The Fed began tapering in $10-billion increments its stimulus programme when unemployment fell to 6.6 and 6.7 per cent in recent months.

Meanwhile, European markets appeared to welcome Draghi’s comments.

Although the FTSE 100 was down 0.2 per cent at closing, the FTSEurofirst Index of pan-European stocks closed higher by 0.1 per cent.

Source: Agencies