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 Draghi said there was now no sign of economic improvement in the
months ahead and that the ECB would expand and step up its programme
to pump more money into the currency bloc if its current measures
fell short of lifting inflation.
"We will continue to meet our responsibility – we will do what we
must to raise inflation and inflation expectations as fast as
possible, as our price stability mandate requires of us," Draghi
said in a speech at an annual banking congress.
"If on its current trajectory our policy is not effective enough to
achieve this, or further risks to the inflation outlook materialise,
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."
"Draghi all but announced that the central bank will step up
monetary easing soon. Mr Maybe has become Mr Definitely," said Nick
Kounis, an economist with ABN Amro. "We think the ECB would exhaust
other alternatives before moving to sovereign QE."
Draghi had said on Monday further measures could involve large-scale
purchases of government bonds, also known as quantitative easing - a
step that is particularly opposed in the bloc's largest economy,
Germany, for fear of mutualising risks.
The head of Germany's powerful Bundesbank, Jens Weidmann, in his
speech at the same event, avoided the subject of monetary policy and
instead spoke about banking regulation.
"We can't be constantly commenting on one another," Weidmann told
reporters as he left the event shortly after his speech.
Draghi's comments pushed 10-year government bond yields in Italy,
Ireland and Austria to new all-time lows. The euro fell 0.8 percent
against the dollar and was down 1.1 percent against the yen.
THE NEW "WHATEVER IT TAKES"
Draghi's remarks were almost as dramatic as his "whatever it takes"
speech in the summer of 2012 with which he pulled the euro zone back
from the brink.
Having earlier in the week pointed to early signs of improvements,
Draghi on Friday said the economic situation remained difficult and
the latest business survey suggested a stronger recovery was
unlikely in the coming months.
"Over shorter horizons, however, indicators have been declining to
levels that I would deem excessively low," he said.
The euro zone economy has been mired in low growth and weak
inflation for months. The ECB is trying to unblock lending to
households and companies by flooding the market with billion of
euros through purchases of securitised private debt.
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But should these not be enough to bring inflation - now at 0.4
percent - back to its medium-term target of just below 2 percent,
Draghi said the ECB would recalibrate the size, pace and composition
of our purchases as necessary.
"This is why the Governing Council has tasked ECB staff and the
relevant Eurosystem committees with ensuring the timely preparation
of further measures to be implemented, if needed."
This could include the purchasing of sovereign bonds.
The ECB would be the last of the major central banks to deploy QE,
though several policymakers have raised concern that the costs of
such a tool would outweigh the benefits.
Borrowing costs of euro zone governments have fallen to record lows
since Draghi's 2012 speech, which leads some observers to doubt the
impact of QE in the euro zone because one key QE effect would be to
weigh on long-term interest rates.
"It has never been cheaper for countries such as France to borrow.
Buying state bonds could influence the price of state bonds, but
wouldn't have much impact on the economy," said Michael Heise, the
chief economist of Allianz.
Draghi acknowledged the different financial structures in the euro
zone, Japan and the United States, but stressed QE may still have an
effect via the currency channel as banks would be expected to shift
into assets outside the euro zone.
"There is evidence that both the various Large Scale Asset Purchase
programmes of the Fed as well as the Bank of Japan’s Quantitative
and Qualitative Easing programme led to a significant depreciation
of their respective exchange rates, even in a situation in which
long-term yields were already very low, as in Japan," Draghi said.
(Reporting By Eva Taylor and John O'Donnell; Editing by Jeremy
Gaunt)
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