The European Central Bank is ready to deploy anything in its monetary policy toolbox if inflation stays too low for too long despite keeping interest rates steady on Thursday, its president said.
The ECB held its main interest rate at a record low of 0.25 percent and the rate for bank deposits at central banks at zero,
hoping the euro zone recovery will gain strength unaided.
ECB chief Mario Draghi told a news conference that he and his colleagues expected a prolonged period of low inflation and that if it dragged on too long, action would be taken.
That marked a significant shift of tone from last month when he appeared to set quite a high bar to action.
“We will monitor developments very closely and we will consider all instruments available to us,” Draghi said. “We are resolute in our determination to maintain a high degree of monetary accommodation and act swiftly if required.”
He emphasized that any policy shift could be over and above interest rate moves, saying: “The Governing Council is unanimous in its commitment to using also unconventional instruments within its mandate in order to cope effectively with risks of a too prolonged period of low inflation.”
He added that printing money – quantitative easing – had been discussed at Thursday’s policy meeting.
Having barely reacted to the earlier policy decision, Draghi’s comments saw the euro drop to a session low against the dollar.
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The resilience in the Australian dollar in recent times may have confused some investors, given worries over the health of China – Australia’s largest trading partner – but investment bank Morgan Stanley says the upward momentum should remain intact for a while.
The Aussie jumped to its highest levels in four months against the greenback Tuesday to $0.9310 after the Reserve Bank of Australia left interest rates unchanged at a record low of 2.5 percent.
The currency is now up 3.7 percent year to date against the U.S. dollar, despite a string of disappointing data out of China both on the manufacturing and trade fronts.
In a note entitled “AUD: Why so strong?” Morgan Stanley says there are a number of factors drawing investors to the Aussie dollar -in particular, the revival of overseas investor appetite for the Australia’s government debt.
They attribute this shift to the fact that the Australian government has returned to printing a lot of new debt, posting a record 23 billion Australian dollars ($21.2 billion) of net bond issuance in the first quarter of this year. This coming after five quarters of little net buying.
Japanese investors led the trend, said Morgan Stanley, buying 5.4 billion Australian dollars in government bonds in the four months to January, having sold 34.2 billion Australian dollars in debt during the 11 consecutive months to September 2013.
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The Australian dollar jumped to its highest level in four months against the greenback after the Reserve Bank of Australia (RBA) left interest rates unchanged at a record low of 2.5 percent.
The currency hit $0.9310 briefly following the decision before pulling back to $0.9270.
The decision was widely expected given signs past policy easing was working to stimulate the economy and they RBA said policy would remain stimulative in order to boost demand and offset the drag from a cooling mining boom.
“Looking ahead, continued accommodative monetary policy should provide support to demand, and help growth to strengthen over time,” RBA Governor Glenn Stevens said in a brief statement after the bank’s April policy meeting.
According to Matthew Circosta, economist at Moody’s Analytics, the strengthening of the Australia economy could bring price pressures back to the fore.
“The non-tradables and import inflation component in the CPI [consumer price index] has been steadily rising as the [Aussie] dollar weakens,” Circosta said. “Overall, inflation may be a problem for the RBA down the track.”
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The euro zone is not in a deflationary cycle and the European Central Bank (ECB) should not overreact to a slowdown in inflation caused largely by cyclical factors which should prove temporary, Bundesbank President Jens Weidmann said on Saturday.
The comments from the head of Germany’s central bank, also a member of the ECB’s governing council, run counter to remarks last week which investors interpreted as a softening of long-held German resistance to more radical action to support growth.
The ECB is running official interest rates at a record low but unlike other major central banks has resisted calls to follow that move with outright “quantitative easing” to pump more money into the economy.
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Japanese Prime Minister Shinzo Abe looks set to drive an indicator of economic hardship to a 33-year high by increasing taxes and prices amid stagnant wages.
The misery index, which adds the jobless rate to the level of inflation, will climb to 7 percentage points in the three months starting April 1 when Japan raises its sales levy to 8 percent from 5 percent, based on the median estimates of economists in Bloomberg News surveys of unemployment and consumer prices. That would be the highest level for the measure since June 1981 when Japan was emerging out of depression after the oil shocks in the 1970s.
Bank of Japan monetary stimulus designed to spur economic growth and achieve 2 percent inflation has weakened the yen by 6.8 percent in the past 12 months, eroding the value of wages to a record low. Abe, the son of an ex-foreign minister who grew up in a house with servants, is under fire from the opposition party after the cost of living surged to a five-year high.
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Gold futures rose for the second straight day amid forecasts that U.S. borrowing costs will hold at a record low and European inflation will pick up gradually.
Expectations that interest rates won’t rise until mid-2015 are appropriate, William Dudley, the president of the Federal Reserve Bank of New York, said today. European Central Bank President Mario Draghi said that the inflation rate will gain in the next 30 months, damping deflation risks. Yesterday, gold climbed after U.S. service industries expanded in February at the slowest pace in four years.
Through yesterday, gold climbed 11 percent this year on demand for a haven amid turmoil in Ukraine and concern that the U.S. is faltering. The Labor Department will release jobs data tomorrow. In 2013, the metal tumbled 28 percent, the most since 1981, as global equities rallied and U.S. inflation was muted.
“Comments from Dudley and Draghi have helped gold find support,” David Lee, a vice president at Heraeus Precious Metals Management in New York, said in a telephone interview. “People will be closely watching tomorrow’s employment numbers to assess the health of the economy.”
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West Texas Intermediate crude fell for a third day as U.S. inventories increased and on speculation that tension between Ukraine and Russia won’t disrupt supplies. The WTI-Brent spread grew to the widest in a week.
Prices dropped as much as 1.3 percent in New York. Stockpiles gained for a seventh week, the government said yesterday, as demand for gasoline and diesel slid. Crimean lawmakers called a March 16 referendum to decide whether to join Russia or stay with Ukraine as European leaders gathered for an emergency summit in Brussels. Futures have declined more than $4 from a five-month high on March 3.
“The inventory report showed a build and that kind of pointed to weak demand,” said Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut. “We are having reduced risk premium from Ukraine. It seems like the rally has failed and we could test the $100 mark.”
WTI for April delivery dropped $1.15, or 1.1 percent, to $100.30 a barrel at 1:13 p.m. on the New York Mercantile Exchange after touching $100.13. The volume of all futures was about 42 percent more than the 100-day average.
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The Australian dollar traded near the weakest level in almost a month before a Reserve Bank policy decision today.
Australia’s three-year government bond yield, among the most sensitive to interest-rate expectations, was near the lowest since September as economists predict the central bank will keep borrowing costs at a record low following data last week that showed business investment fell more than expected. Demand for the Aussie and its New Zealand counterpart was also limited as continuing tension over Ukraine curbed demand for higher-yielding assets.
“If the RBA inserts some downbeat views on business investment following last week’s capital expenditure data, that might catch a few people off guard, so you might see some selling in the Aussie,” said Joseph Capurso, a Sydney-based currency strategist at Commonwealth Bank of Australia. “If we do get continuing escalation in the confrontation, you’d have to say Aussie would go down rather than up in response,” Capurso said in reference to the standoff in the Crimea region.
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The pound advanced against the dollar as data showed a surge in business investment helped the British economy grow for a fourth straight quarter, boosting the allure of the U.K. currency.
Sterling rose versus the euro this week as Bank of England policy makers expressed little concern that the strength of the currency would harm the economy. Officials also said any increases in interest rates from a record low will be gradual and limited. Central bank Chief Economist Spencer Dale told Bloomberg there will probably be a “healthy” split among voting members on when to raise rates. U.K. government bonds advanced for a second week.
“We are seeing a gradual spillover of the recovery from consumption into the investment sector,” said Vasileios Gkionakis, head of global foreign-exchange strategy at UniCredit SpA in London. “This means that the recovery is becoming more sustainable. The pound will benefit from it because you will be talking about a strong and well-balanced economy and the Bank of England is going to hike rates earlier than consensus expects.”
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Lending to households and firms in the euro zone fell again in January and money supply growth remained subdued, adding to pressure on the European Central Bank to take action next week to support the economy.
The ECB has cut interest rates to a record low, pumped extra liquidity into the banking system and announced a fresh government bond purchase program, but the measures have so far not managed to unclog lending to the real economy.
Euro zone inflation is also running at only 0.8 percent – far below the ECB’s target of just under 2 percent.
Loans to the private sector fell by 2.2 percent in January from the same month a year earlier, ECB data released on Thursday showed. That compared to a contraction of 2.3 percent in December.
Euro zone M3 money supply – a more general measure of cash in the economy – grew at an annual pace of 1.2 percent, picking up slightly from 1.0 percent in December.
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