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ECB President Warns of Unstable Prices, Urges Reforms

ECB President Warns of  Unstable Prices, Urges ReformsECB President Warns of  Unstable Prices, Urges Reforms

Price stability in the eurozone is more at risk than six months ago, according to ECB President Mario Draghi said, and urges member states to speed up reforms.

"The risk that we do not fulfill our mandate of price stability is higher than six months ago," Mario Draghi, president of the European Central Bank (ECB), told German financial newspaper Handelsblatt in an interview published on Friday.

Inflation in the 19-member eurozone dropped to just 0.3 percent in November, an alarmingly low level, given the ECB's target of keeping the rate of inflation at roughly 2 percent.

Draghi told the paper that the risk of deflation was "limited." Falling prices would most likely strangle economic growth as both consumers and businesses kept deferring spending and investments in the hope of prices dropping even further.

The ECB was prepared to intervene, Draghi said. "We are in technical preparations to adjust the size, speed and compositions of our measures in early 2015, should it become necessary to react to too long a period of low inflation."

The ECB has already used measures like asset purchases and making cheap loans to banks available to stabilize prices. It is also considering large-scale purchases of sovereign debt, so-called quantitative easing (QE) to boost the bloc's struggling economies.

Draghi also criticized member states, including Germany, for not doing enough to implement much needed structural reforms.

"The problem is threefold – a lack of reforms, red tape and high taxation. If we don't tackle those, growth will remain weak," he told the paper.

Factory Activity Ends Modestly

Eurozone manufacturing ended 2014 on a subdued note as output, new orders and employment all recorded sluggish growth, a survey showed on Friday, adding to pressure on the European Central Bank to boost the economy, Reuters reported.

Also of concern to policymakers, who are struggling to nurture growth and ward off deflation, the survey showed factories cut prices for the fourth month running and activity was weak in Germany, Europe's largest economy.

The downturn also deepened in France, the bloc's second-biggest economy.

"Eurozone factory activity more or less stagnated again in December, rounding off a year which saw an initial, promising-looking upturn fade away and stall in the second half of the year," said Chris Williamson, chief economist at survey compiler Markit.

Markit's final December manufacturing Purchasing Managers' Index stood at 50.6, down from an earlier flash reading of 50.8 but beating November's 17-month low of 50.1.

That is above the 50 mark that separates growth from contraction, but there was little sign of any improvement this month, with the subindex for new orders at just 50.2, leading factories to barely increase headcount in December.

Good Indicator

An output index, which feeds into a composite PMI due next Tuesday that is seen as a good indicator of growth, fell to 50.9 from the flash reading of 51.2, which matched November's final figure. December's final figure was the lowest since June 2013.

Williamson said the weakness, coupled with muted service sector growth signaled by mid-December's flash PMI, pointed to fourth-quarter economic growth of just 0.1 percent.

Increasing fears that plunging oil prices may send the bloc into a deflationary spiral, alongside a stagnating economy, will push the ECB to buy sovereign debt early in 2015, a Reuters poll showed last month.

"Expectations have risen that the ECB will also announce more aggressive policy stimulus in the New Year once it has had time to assess current policy initiatives," Williamson said.

Euro 4.5 Years Low

The euro weakened to a 4 1/2-year low, while Spanish and Italian bonds rose amid speculation the European Central Bank will boost stimulus. Standard & Poor’s 500 Index futures signaled the gauge will rebound and the dollar gained.

Europe’s shared currency fell 0.4 percent to $1.2053 at 6:40 a.m. in New York and the dollar rose versus all of its 16 major peers. Italian and Spanish yields fell to record lows.

S&P 500 futures climbed 0.3 percent and Treasuries declined. The Stoxx Europe 600 Index slipped 0.3 percent. Oil pared earlier gains as Enbridge Inc. restarted its North Dakota pipeline system after a fire at a truck-loading facility.

 

Financialtribune.com