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ECB Under Pressure to Tackle Deflation Threat

© Fotolia / VRD ECB chief raises prospect of buying government bonds in an effort to stimulate the Eurozone.
ECB chief raises prospect of buying government bonds in an effort to stimulate the Eurozone. - Sputnik International
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ECB chief raises prospect of buying government bonds in an effort to stimulate the Eurozone.

MOSCOW, November 21 (Sputnik) — The President of the European Central Bank has raised the prospect of using radical measures to jumpstart the Eurozone’s flagging economy, in a speech made to the Frankfurt European Banking Congress on Friday.

“We will do what we must to raise inflation and inflation expectations as fast as possible, as our price stability mandate requires of us, Mario Draghi said in the speech.

Draghi warned that if current measures failed to raise inflation, the Central Bank “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.”

Figures from Eurostat, the EU statistics agency, report that inflation in the Eurozone increased from 0.3% (annualized) in September to 0.4% in October, which reversed the downward trend in inflation from 0.8% in January, but remaining well below the ECB target of close to, but below 2%.

Martin van Vliet, an economist at ING, told the Guardian last month that the small increase provided little succor for ECB policymakers. “Given the recent, sharp drop in commodity prices, we do not expect the food and energy component to provide further upward pressure to the headline rate in coming months – if anything, renewed downward pressure may be in the pipeline. Against this backdrop and with eurozone economic growth lackluster, the ECB will likely remain under pressure to do more to steer inflation back to their target.”

In October, the ECB began buying covered bonds and asset-backed securities as part of a package that also cut interest rates to record lows. On Monday Juergen Stark, a former ECB economist told CNBC that he doubted the measures would add the desired €1 tn to the ECB balance sheet, and thus into the money market, and predicted it “very likely that eventually the governing council will agree to buy government bonds,” a move he expects will take place in Spring 2015.

In Friday’s speech Draghi reiterated comments he had made to the European Parliament on Monday that the purchase of sovereign bonds is one of the “unconventional measures” which might be used to stimulate the economy, a stimulus used by the US Federal Reserve since the 2008 financial crisis.

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