European Central Bank President Mario Draghi has said the ECB will keep interest rates extremely low for a long time. He vowed the bank would not “surrender” in its fight against the threat of deflation in the eurozone.
At a news conference in Frankfurt on Thursday, at which he discussed ECB’s monetary policy stance, Draghi made it clear that no-one should expect a rate rise anytime soon, despite the fact that his counterparts at the Federal Reserve, the US central bank, recently raised rates for the first time in several years–albeit only very modestly, DW reported.
In contrast, Draghi said, borrowing costs in the eurozone will “remain at present or lower levels for an extended period of time.”
The chief monetary authority for the 19 countries that use the euro currency left its key interest rates untouched after its January meeting Thursday, and did not ramp up its existing, already gigantic €1.5 trillion ($1.64 trillion) monetary stimulus program.
Fear of Deflation
The eurozone’s top banker clearly remains concerned the economies of the euro currency area remain vulnerable to a deflationary spiral. Deflation is something central bankers fear like the devil’s horns, because once prices start falling, consumers can be tempted to delay purchases, leading to reduced aggregate demand.
Reduced demand means reduced business orders, which tends to be followed by further price-slashing by desperate businesses, and so on in a self-reinforcing spiral. Deflation was the cause of the disastrous Great Depression in the US and in Germany in the 1930s.
Never Surrender
“We are not surrendering,” Draghi told a news conference in the face of the fact that a wide range of policy measures rolled out by ECB in the past 18 months have failed to steer eurozone inflation back up to the level of just under 2% which the central bank sees as conducive to healthy economic growth.
Mario Draghi says the ECB could take fresh monetary action in the coming months, prompted by “heightened uncertainty” in the global economy and a weaker-than-expected inflation outlook. The bank is to “review and to reconsider monetary policy” at its March meeting.
That suggests ECB could end up pumping even more newly created money into the financial markets, over and above the roughly €60 billion ($65 billion) a month it has already been creating to buy bonds off secondary markets since March 2015.
Stocks, Oil Rise
Stocks and oil, at the forefront of a global market rout since the turn of the year, rebounded strongly on Friday thanks to hints of more monetary policy support by the ECB and bargain-hunting from bruised investors, Reuters reported.
World stocks recorded their biggest rise in a month and Asian stocks their best day in three months. Oil rallied around 5% for the second day in a row, recovering from 12-year lows to above $30 a barrel.
The surge comes a day after ECB President Mario Draghi signaled the central bank would ease policy further at its next meeting, in March to combat fading growth and disinflation, a message he reiterated at the World Economic Forum in Davos on Friday.
European stocks followed Asia’s lead. The region’s main indices rose around 2% for the second consecutive day. Remarkably, given the recent steep declines, some were on track for their best weekly performance in two months.
In early trade on Friday the FTSEuroFirst 300 index of leading European shares was up 2.2%, putting it on track for a weekly gain of around 2%.
Germany’s DAX was up 2% and headed for a weekly rise of 2.2%. Britain’s FTSE 100 was up 1.8% on the day and France’s CAC 40 was up 2.5%.
Earlier this week, all of them had entered “bear market” territory, meaning they were down 20% or more from last year’s peaks.
MSCI’s broadest index of Asia-Pacific shares outside Japan rose 2.4% on Friday, the most since Oct. 7 last year, after touching a four-year low on Thursday.
That puts the index on track for a 0.2% gain for a week in which oil prices plunged and concern over China’s economy pummeled risk assets globally. Japan’s Nikkei surged 5.9% at the close, the most in more than four months. Chinese stocks, which had fallen almost 20% since the turn of the year, rose 1.3%.
