Euro’s Fall Lowest Since 2010, Following ECB President’s Comments
Following the comments from the president of the European Central Bank (ECB) Mario Draghi, the Euro value has fallen to its lowest level since the middle of 2010.
He hinted that the bank might start a policy of quantitative easing in order to stimulate the eurozone economies, in a newspaper interview.
This step is aimed to prevent the falling of the general level of prices.
After Mr. Draghi’s comments were made public, the euro fell 0.4% to $1.2034.Recently, the official eurozone inflation rate has fallen to just 0.3%.
1. Taking Measures
For stopping this deflation – falling prices – getting a hold of the world’s largest trading bloc, the ECB could launch its own program of quantitative easing (QE). This would be possible by buying government bonds which is a similar move to its counterparts in the UK and the US.
It aims to infuse cash into the banking system, hence, stimulating the economy and pushing the prices higher.
“We are making technical preparations to alter the size, pace, and composition of our measures in early 2015”, said Mr. Draghi while speaking in an interview with the German newspaper Handelsblatt.
A currency analyst at Bank of Tokyo-Mitsubishi UFJ named Lee Hardman suggested that the “The comments suggest the ECB will soon adopt sovereign debt QE, which may come as soon as their next meeting.”
Due to this extra demand from the central bank, if there is a price rise, the obtainable yield for the bond investors would fall. This would be caused due to the resultant knock-on effect of reducing the general level of interest rates in the eurozone banking system.
This is the view which has weakened the value of the euro on the foreign exchanges.
2. Ample Hints
A full-scale program of QE has not yet been launched despite the fact that the ECB has already cut interest rates to a record low level. It has also bought some bonds issued by private companies.
But it has been on the cards since Mr. Draghi made the first of a series of comments in April 2014, suggesting that he might trigger such a policy in the near future.
Niels Christensen, an FX strategist at Nordea said, “It [the euro] could break below $1.20 since there is a risk of a very low inflation reading out of the eurozone next week”. Adding further he said, “That will just add to pressure on the ECB to take measures when it meets later this month.”
ECB policy meeting will be next held on 22 January.
3. Eurozone Concerns
Consumer inflation has been falling since a 3% peak late in 2011. It has not been at ECB’s target level of just below 2% since the beginning of 2013. The eurozone’s low inflation is held responsible for depreciating growth and is said to have already prompted ECB stimulus measures.
In September, the bank said it would start buying covered bonds. These bonds are bonds backed by public sector loans or mortgages. Mr. Draghi said that the ECB staff ‘have stepped up the technical preparations for further measures, which could if needed, be implemented in a timely manner’ in his December speech.
Traders have multiple apprehensions regarding eurozone in 2015, including the result of a snap election in Greece on 25 January. The left-wing Syriza coalition is leading in opinion polls. It has rejected the EU austerity measures which have been responsible for soaring unemployment and the growing poverty in the country.
If Greece fails to stick with its agreed austerity program, there is uncertainty about its future.Mr. Draghi’s remarks are yet another indication that full-scale quantitative easing in the eurozone is probably approaching. It could come anytime within three weeks. The ECB’s first major policy meeting of the year is on 22 January. The first estimate for eurozone inflation will come next week, in December.
The previous month’s figure was 0.3%, if it goes any lower it would cause an early action by the ECB. And there is no dearth of reasons to believe that the inflation might be lower. There is a continued decrement in global oil prices and the latest business survey data suggests that the eurozone is still weak. There are figures suggesting prices falling more severely in Spain during December.