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European central bank considering 'further stimulus' if inflation remains low

Wednesday, April 16th 2014 - 04:20 UTC
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Draghi hinted that QE, the large-scale purchase of financial assets, may be needed Draghi hinted that QE, the large-scale purchase of financial assets, may be needed

European Central Bank (ECB) has said it will provide “further stimulus” to the Euro zone economy if inflation in the bloc continues to remain low. Mario Draghi, said a stronger Euro would act as a trigger to looser monetary policy.

 The rise of the single currency's exchange rate is one of the main reasons Euro zone inflation is at a dangerously low 0.5%. One of Mr Draghi's stimulus options would be quantitative easing (QE). That is something the International Monetary Fund has been suggesting as concerns grow about deflation in the Euro-zone.

Speaking after the IMF's spring meeting in Washington, Mr Draghi hinted that QE - the large-scale purchase of financial assets - may be needed.

“If you want policy to remain as accommodative as now, a further strengthening of the exchange rate would require further stimulus,” he said.

Earlier this month the ECN kept interest rates steady, at a historic low of 0.25%, but Mr Draghi said its members were unanimous in their willingness to begin QE if inflation stayed well below their 2% target.

Their fear is that falling inflation could harm the Euro zone's fragile economic recovery by reducing consumer spending - because people would be likely to put off purchases, believing prices will continue to fall. Low inflation also means governments and businesses find it more difficult to repay their debts.

However, most analysts believe Mr Draghi's more likely choice would be a further cut in the ECB's benchmark interest rate, currently at a record low of 0.25%.

The bank's policymakers recently raised the idea of cutting the rate to below zero, effectively charging banks that hold excess cash at the ECB. Such measures could be needed, Mr Draghi said, because of a euro that has strengthened by nearly 5.5% against the dollar, and by nearly 10% against the Japanese yen in the last year.

The currency's strength, Mr Draghi said, accounted for a half percentage point of the decline in the annual inflation rate.

“I have always said that the exchange rate is not a policy target, but it is important for price stability and growth,” he added. “What has happened over the last few months is that it has become more and more important for price stability.”

Categories: Economy, International.

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