ECB chief Mario Draghi says bank ‘will not hesitate to act’ in March if market turmoil continues

BRUSSELS/FRANKFURT — The ecu Central Bank is ready to ease policy in March when the recent financial market turmoil or even the long-term impact of low energy prices threatens to help keep inflation persistently low, its president Mario Draghi said on Monday.

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“First, we will examine the effectiveness of the pass-through of low imported inflation to domestic wage and value formation and to inflation expectations,” Draghi told the European Parliament’s Economic and Monetary Affairs Committee.

“Second, within the light of the recent financial turmoil, we’ll analyze your transmission in our monetary impulses through the economic climate and in particular by banks,” Draghi said. “If either of these two factors entail downward risks to price stability, we will not hesitate to do something.”

Draghi’s comments come after weeks of heightened market volatility, which has reversed a lot of the outcome of the ECB’s December easing, increasing pressure around the bank to ease further in March.

Indeed, Draghi has already said the bank will review and perhaps recalibrate its policies if this meets on March 10, a strong signal taken by markets being an almost certain commitment to act.

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The euro has firmed 3 percent because the start of the year, cutting imported inflation while euro zone stocks are down 13 per cent, increasing funding cost for firms.

But perhaps more importantly, the 22 per cent fall in banking shares might increase the price of capital for banks, potentially holding back lending and reducing the effectiveness from the ECB’s quantitative easing.

“The problem within the banking sector now’s quite different from what it was at 2012,” Draghi said. “Perhaps most significantly, euro area banks have significantly strengthened their capital positions over the past few years, notably as a consequence of the Comprehensive Assessment conducted in 2014.”



However, some banks still face challenges, ranging from uncertainty about litigation and restructuring costs to some high stock of non performing loans, Draghi added.

Draghi said the ECB was ready to do its part but also called on governments encourage by with supportive fiscal policies that lift public investment and help economies through lower taxation.

In December, the ECB cuts its deposit rate by 10 basis suggests -0.3 percent and extended its asset buying program by 6 months, using the program to 1.5 trillion euros.

Markets now price-in at least two rate cuts, taking the deposit rate to -0.Half by the end of the entire year from -0.3 percent. But analysts tend to be more cautious, expecting just one rate cut to -0.4 percent.

? Thomson Reuters 2016