European Central Bank President Mario Draghi's promise to do what is necessary to reach the bank's inflation target sent the euro into sharp reverse Friday bringing it back to within 25 points of its seven month low.
“If we decide that the current trajectory of our policy is not sufficient to achieve that objective, we will do what we must to raise inflation as quickly as possible,” Draghi said in a speech to the European Banking Congress at the Old Opera House in Frankfurt. “In making our assessment of the risks to price stability, we will not ignore the fact that inflation has already been low for some time.”
The euro fell from yesterday's high of 1.0773 as low as 1.0639 and closed in New York at 1.0645.
Although inflation in the 19 nation European Monetary Union (EMU) registered just 0.1 percent in the twelve months to October that was an improvement from -0.1 percent in September. So far this year price changes in the EMU are non-existent, the monthly average CPI is flat for the year. The last time the inflation rate was at the ECB's 2.0 percent target was January 2013.
Draghi’s promise underlines the ECB’s concern that prices in the EMU will continue to fall despite the central banks current 1.1 trillion euro stimulus package.
Euro zone economic growth was just 0.3 percent in the third quarter. Falling energy and commodity prices and weak global demand has pressured consumer prices around the world.
ECB policy makers are considering expanding its quantitative-easing program that started in March by adding to the types of securities it purchases or even taking the main-refinance rate, currently at 0.05 percent, negative. The deposit facility rate is already at -0.2 percent.
Negative rates are already common in short term European sovereign debt. The yield on German 2-year bonds fell to a record low of - 0.389 percent in Frankfurt on Friday. The yield on the generic French 2 year bond was -0.309 percent and the current Italian 2 year bond was returning 0.0 percent. Even Switzerland, though not in the EMU has seen demand for the country's debt soar, driving the rate note for the generic two year bond to -1.007 percent.
The ECB's policy board, the governing council will meet next on December 3rd and after Mr. Draghi's speck today an increase in the banks quantities program is a virtual certainty.
The ECB is currently buying 60 billion euros a month of bonds and has said the program will last at least through September 2016. It is now expected to raise ether amount of purchases each month and perhaps expand the types of securities that it will buy to the commercial market.
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