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9th Dec 2019

Euro at its weakest since 2006 after Draghi drops QE hint

  • Financial markets are expecting the European Central Bank to unveil a governing bond-buying programme within weeks (Photo: Council of European Union)

The euro has begun 2015 at its lowest level in more than eight years, as markets expect the European Central Bank to present plans to buy government bonds in the coming weeks.

The single currency was trading at $1.19 on Monday (5 January), its lowest rate since 2006, after ECB president Mario Draghi gave an interview stating that the bank was preparing a programme to buy up government securities in its latest bid to stimulate greater consumer demand and avoid deflation.

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Speaking to German daily Handelsblatt on Friday (2 January), Draghi said the ECB was preparing to expand its stimulus programmes beyond offering cheap loans to banks and buying private sector bonds.

"We are in technical preparations to adjust the size, speed and compositions of our measures in early 2015," said Draghi, who will convene the next meeting of the bank's Governing Council, where the support of a majority of its 25 members would be needed for a decision to be taken, on 22 January.

He added that “concrete measures” were being prepared to establish a programme of government bond buying.

Buying government bonds - a process known as "quantitative easing" but which is the same as printing money - would see the ECB follow in the footsteps of the US Federal Reserve and the Bank of England.

Central banks hope that injecting more cash into the economy will drive up demand and force up prices.

Draghi added that the risk of negative inflation had increased, commenting that “the risks of not fulfilling our mandate of price stability are in any case higher than they were six months ago”.

“Inflation has been low for some time now. This is partly due to falling oil prices and corrections of high prices in some countries, but also to weak demand,” he added.

Eurostat’s monthly inflation data to be published on Wednesday is likely to show that prices fell by 0.1 percent in December, the first decline since 2009. Under its statutes, the ECB is required to keep inflation as close to 2 percent as possible.

Market analysts are forecasting another difficult year for the single currency bloc, predicting that the euro will continue to weaken against the dollar over the course of 2015, as a result of a combination of very low inflation and weak economic performance.

Forty-four of 59 analysts asked by a Bloomberg survey said the euro would drop against the dollar in 2015 by a 2.5 percent average.

Although only two of the eurozone’s nineteen countries - Italy and Cyprus - are in recession, the bloc’s economy remains largely stagnant.

The eurozone economy is forecast to have grown by a mere 0.8 percent in 2014, and to grow by a meagre 1.2 percent in 2015, well below the US.

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