Draghi Says Further Stimulus in December Remains 'Open Question'

  • Draghi says it's `too early' to judge lowering deposit rate
  • Will take `necessary actions' if inflation outlook at risk

President Mario Draghi said that it’s still an “open question” whether adding further stimulus will be necessary at the European Central Bank’s next policy meeting in December.

“If we are convinced that our medium-term inflation target is at risk, we will take the necessary actions,” he said in an interview with Italy’s Il Sole 24 Ore published on Saturday. “We will see whether a further stimulus is necessary,” Draghi said, adding that it was “too early” to pass judgment on lowering the deposit rate further below zero.

At a press conference in Malta on Oct. 22, Draghi said the Governing Council would re-examine its current stimulus policies, including the size, duration and composition of its quantitative-easing program, at its Dec. 3 meeting. Seven months after starting asset purchases, the ECB is faced with stagnant prices on the back of weak oil prices while slowing global demand threatens the region’s recovery.

“We expect inflation to remain close to zero, and maybe even to turn negative, at least until the start of 2016,” Draghi is cited as saying in Il Sole. “After that, the effect of the sharp decline in oil prices that we have seen between the end of 2014 and the end of this year will disappear from the one-year ahead annual price index. This will lead to a purely mechanical increase in annual inflation.”

The ECB will publish updated forecasts for growth and inflation in December. In September, it predicted prices would rise 1.1 percentage points in 2016 and 1.7 percentage points in 2017.

Draghi’s words in Malta sparked a rally in euro-zone bonds. The yield on two-year German notes plunged and money markets also rallied. Italy’s two-year note yield also briefly turned negative for the first time after the ECB President spoke.

Since then, new economic data have suggested that the recovery in the region is resilient and inflation is holding up. Data on Friday showed that a decline in consumer prices in the euro area halted this month, with core inflation edging up and unemployment unexpectedly dropping in September.

“After the meeting in Malta, we asked all the relevant committees and ECB staff to prepare analyses of the relative effectiveness of the different options for the December meeting,” Draghi said in the interview. “We will decide on this basis. We will see whether a further stimulus is necessary.”

The ECB president also said that retouching the deposit rate, currently at minus 0.2 percent, "could be one of the instruments that we use again." While Draghi had assured over a year ago that rates were at the lower bound, new information now shows that "the lower bound of the interest rate on deposits is a technical constraint and, as such, may be changed in line with circumstances."

"The main test of a central bank’s credibility is –- as I have said before –- the ability to achieve its objectives; it has nothing to do with the instruments," he added.

Draghi was also asked about the relevance of other central banks’ decisions, crucially the Federal Reserve, on the ECB’s monetary-policy decisions.

"They form part of the set of information that we, like the other policy-makers, use to take our decisions,” he said. "As far as the Fed is concerned, there’s no direct link between what we are doing and what they are doing. Both central banks have their mandate defined by the jurisdiction in which they operate, for them it’s the United States, for us it’s the euro area."

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