Thursday

18th Jan 2018

ECB considers printing more money

  • The ECB governing council comprises of the chiefs of central banks from the 18 eurozone member states (Photo: European Central Bank)

The European Central Bank over the next months will consider various options of 'quantitative easing' - also known as money printing - to counter a very low inflation rate, ECB chief Mario Draghi said Thursday (3 April) in a press conference.

"The ECB Governing Council is unanimous in its commitment to using all unconventional instruments within its mandate, in order to cope effectively with risks of a too prolonged period of low inflation," he said.

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Draghi said quantitative easing was part of a "rich and ample discussion" on Thursday among the central bankers from all 18 eurozone countries on what to do to counter the lower-than-expected inflation.

Quantitative easing, popularly known as money printing, is the purchase of financial assets from banks to increase the amount of money in circulation when there is a risk of deflation.

At just 0.5 percent, eurozone inflation is well below the ECB target of two percent. A negative rate means deflation, when prices drop and consumers spend less in the hope that they will get a better deal the following days and weeks.

This in turn means fewer sales for companies and a drop in exports, as the euro becomes stronger.

Draghi said there is still no risk of deflation, but stressed that the ECB was willing to act to counter low inflation, too, not just deflation.

The ECB chief blamed the low inflation on a drop in international energy and food prices and "the exceptionally late Easter" which meant that demand for services in March was lower than last year.

For now, the ECB decided to keep the key interest rate at its record low of 0.25 percent, but Draghi signalled that it may be further lowered if inflation does not increase over the next months.

He also refused to give details of how the quantitative easing would work, saying just that "the ECB will work on different options, to see which would be the most efficient".

The ECB chief also said the governing council was "unanimous in its commitment to using also unconventional instruments".

This was a veiled reference to Germany's inflation-averse Bundesbank, which has consistently opposed any moves that would weaken the euro and increase inflation.

Asked what his biggest concern is for the eurozone, Draghi said: “My biggest fear is actually to some extent a reality and that is the protracted stagnation, longer than we have in our baseline scenario.”

The longer this stagnation persists, combined with high unemployment, the harder it will be to combat it with "conventional policy measures," he said, suggesting that money printing may be unavoidable.

Commenting on the ECB announcements, ING chief economist Carsten Brzeski said: "There are clearly two key take-aways from this sharpened language: the ECB is on even higher alert than before and unconventional measures, including the for markets so important QE, are backed by all ECB members."

But Brzeski doubts that quantitative easing will happen soon, especially if April data (with Easter increasing demand) shows slightly higher inflation.

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In a marked shift from its age-old taboo of accepting higher inflation, the German Bundesbank has said it may tolerate a devaluation of the common currency to help out crisis-hit countries.

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