The euro continued to sink on Friday, falling to its lowest in four and half years on clear indications the European Central Bank is set to start printing more money soon – officially called quantitative easing – to stimulate the region’s economy.
The latest slump for the euro came after ECB head Mario Draghi said interest rates in the currency bloc are set to stay lower for longer – in contrast to the United States – and the central bank stands ready to respond to the risk of deflation.
In a newspaper interview Draghi gave his strongest signal yet on quantitative easing when he said the bank is preparing to “adjust the size, speed and compositions” of its measures early this year “should it become necessary”.
Addressing the idea that the German’s object he said: “There is unanimity within the Governing Council on this.”
But some are sceptical that the ECB is really going to go for full-blown quantitative easing any time soon.
Joe Rundle, Head of Trading at ETX Capital said: “I think Draghi is the master of talking about ECB solutions but not actually pulling the trigger on them.”
Rundle added: “Being honest, the ECB is running out of options. Quantitative easing or full-blown sovereign QE seems to be in the distance at the moment with the political ramifications of it. So without that he doesn’t really have many tools.”
This all hinges on fears of deflation; that is prices falling to such an extent that people in the eurozone would delay buying particularly expensive items on the basis that they will get cheaper, which in turn has a negative effect on economic growth.
Draghi said the risk of deflation across the eurozone could not be excluded but added: “It is limited”.
The ECB, which targets inflation at just below 2.0 percent, is due to hold its next policy meeting on January 22.
Eurozone inflation data due out next Wednesday is forecast to show prices falling in annual terms.