ECB President Draghi Hints At Government Bond Purchases To Fight Deflation

European Central Bank President Mario Draghi commented on Friday that the ECB would take all measures necessary to prevent deflation, including increasing the pace and type of bond purchases.

Analysts say this is a strong hint that Draghi is willing to take the drastic step of quantitative easing, or buying of government bonds, despite Germany’s long-standing opposition to the idea. “Draghi all but announced that the central bank will step up monetary easing soon. Mr Maybe has become Mr Definitely,” commented Nick Kounis of ABN Amro.

Of note, the annual inflation rate in the euro zone was 0.4% in October, well below the ECB’s medium-term target of a hair under two percent.

ECB President Draghi Hints At Government Bond Purchases To Fight Deflation

Statements from Draghi

“We will do what we must to raise inflation and inflation expectations as fast as possible,” Draghi remarked in a speech to an audience of bankers in Frankfurt.

“If … 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,” he noted.

ECB started buying asset-backed bonds this week

Draghi’s comments today are somewhat surprising given the ECB has also just announced that it had started buying European asset-backed securities. The central bank is taking this step, together with purchases of covered bonds, (debt typically backed by property), to try and encourage banks to increase lending and give the euro zone economy a jump start.

It should also be mentioned that Draghi said earlier this week if current measures were not enough, or if inflation expectations continued to decline, the ECB would consider broadening purchases to include the debt of euro zone governments, a riskier measure which German policymakers have long opposed.

The euro zone economy only grew an anemic 0.2% in the third quarter, meaning a disappointing annual rate of 0.8%, based on a flash estimate from European statistical agency Eurostat. In fact, data from Eurostat shows that Italy has already slipped back into recession.

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