Mario Draghi ready to prop up eurozone with more stimulus

ECB president says growth prospects in the single currency area have suffered and could worsen if China’s slowdown bites

The euro fell sharply and stock markets rose after the European Central Bank boss said he was ready to provide more stimulus to prevent the eurozone’s faltering economy being hit by worries over China.

The ECB’s president, Mario Draghi, said the eurozone’s growth prospects had suffered in recent months and could worsen if the slowdown in China and turmoil in emerging markets took a turn for the worse.

He said he expected to have a better sense of the outlook for the Chinese economy after the meeting of G20 finance ministers and central bank policymakers in Turkey at the weekend, but in the meantime he held open the possibility of pumping further funds into the Europe’s banking system to boost growth.

“We are observing a weakening of the prospects of the Chinese economy,” he said.

“This has two effects substantially. One is through the trade channel, weakening the economies of the rest of the world … and the confidence effect on the stock market and all the other financial markets, which is also operating on the negative side.”

Draghi’s comments echoed a report earlier this week from the International Monetary Fund that said weakening growth in emerging markets, largely in response to a cut in China’s forecasts, would damage the recovery of the global economy.

The IMF said central banks should maintain flows of cheap credit to households and businesses and consider opening the taps further if the global situation deteriorates.

Stock markets have gained and lost trillions of dollars in recent weeks as traders wrestle with a stream of dire economic figures from China.

The data, which included an 8% fall in exports in July, has triggered a series of responses from Beijing that included cutting the value of the yuan and buying the shares of smaller companies on the Shanghai exchange.

Despite the IMF’s caution, the US Federal Reserve meets on 17 September to consider raising its main interest rate. The Bank of England governor, Mark Carney, said last weekend that the UK was on track for higher borrowing costs early next year.

Draghi said the G20 summit was an opportunity to find out whether the current downturn was a blip or a more protracted situation. “We do expect to have much more visibility than we have today in the coming days of the G20 in Ankara. That is going to be one of the major themes of the meetings.”

The ECB, which kept interest rates on hold, has already started a €1.1tn (£802bn) government bond-buying programme this year. The quantitative easing (QE) scheme, which involves injecting €60bn into the banking system each month, is due to end in September 2016, but assets purchases can run for longer if necessary, Draghi said.

The stimulus is intended to help get consumer price inflation back toward the ECB’s target of just below 2%. In the year to August, it stood at 0.2%. Draghi said it could go negative in the coming months following recent oil price falls.

The euro dropped 1% against the dollar and the yen as traders bet on the ECB flooding the eurozone with extra funds in an effort to counteract some of the fallout from Asia.

Stock markets jumped at the prospect of cheap credit and a lower-value euro boosting business profits. The German Dax and French CAC rose by more than 2.5% and the FTSE climbed 110 points to 6194, up 1.8%.

Howard Archer, the chief European economist at IHS Global Insight, said Draghi was preparing the ground for further stimulus with his remarks.

“The door is now clearly wide open to the ECB stepping up its near-term pace of QE and/or increasing its overall size and duration,” he said.

“Whether the ECB steps through that door will clearly depend on whether eurozone growth continues to struggle and inflation prospects deteriorate further.”

Andrew Bosomworth, a spokesman for the bond fund manager Pimco, said the ECB was beginning to mimic the Bank of Japan as it struggled to deal with a stagnating economy buffeted by volatile financial markets.

“The ECB has limited confidence in reaching its inflation objective over the next two years, the policy-relevant time horizon, suggesting more stimulus might be needed.

“While the ECB’s QE programme was always open-ended from the start, downside risks to the 2017 inflation forecast raise the likelihood the ECB increases the quantity of bonds it purchases each month from €60bn or continues QE beyond September next year.”


Phillip Inman Economics correspondent

The GuardianTramp

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