MARIO Draghi buoyed investors yesterday as he opened the door for further quantitative easing should global market tremors and the emerging markets slowdown threaten eurozone recovery.

The euro and eurozone government bond yields plunged after the ECB president indicated it stood ready to extend the ‘size, composition and duration’ of its 1.1tn euros bond-buying programme.

After presenting a set of downgrades to the ECB’s quarterly projections for inflation and growth, Mr Draghi warned that risks threatening both had increased since the forecasts were devised in the middle of last month.

“The cut-off date to the projections was August 12. So the events that took place since then are a downside risk to the projections themselves,” he said, referring to the market sell-off that followed the devaluation of the renminbi.

Eurozone equities rally as euro falls

The euro dropped by nearly 1pc against the dollar to 1.11 euros, as his dovish comments buoyed hopes of further central bank stimulus. The Eurofirst 300 stocks index strengthened further, rising 2.2pc, and 10-year benchmark eurozone government bond yields nearly all fell by several basis points.

Mr Draghi viewed lower oil prices as the main culprit for falling inflation in a region that has yet to recover the ground it lost during the financial crisis. But it is the slowdown in emerging market economies, notably China, that is clearly of particular concern to the ECB.

“We are observing a weakening of the prospects of the Chinese economy,” Mr Draghi said. “This has two effects substantially: one is through trade . . . and the confidence effect on the stock market and all other financial markets.”

Mr Draghi’s fears of an emerging market-led slowdown contrast with the more sanguine view of US Federal Reserve officials, several of whom have played down risks from China as they consider raising rates for the first time in almost a decade.

In a sign of policymakers’ willingness to reinforce their QE package, the ECB raised the purchase limit of a single country’s debt stock from 25pc to 33pc. That decision should remove some of the constraints on central bankers in member states such as Germany, where the government has voiced its reluctance to issue more debt in the coming years.

Inflation forecasts for this year were revised down to 0.1pc, from the 0.3pc estimate in June, 1.1pc next year from 1.5pc, and 1.7pc in 2017 from 1.8pc. The bank targets inflation of just below 2pc. Growth forecasts were revised down to 1.4pc this year, from 1.5pc.

At the moment, the central bank plans to buy about 60bn euros of mostly ­government bonds each month until September 2016. Mr Draghi said for the first time that the purchases were intended to run until then ‘or beyond, if necessary’.

Published in Dawn, Economic & Business, September 7th, 2015

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