Mario Draghi rejected the International Monetary Fund's call for immediate action to combat growing deflationary pressures as the European Central Bank adopted a wait-and-see approach to fresh measures to boost growth. Despite warnings from the fund and the Paris-based Organization for Economic Co-operation and Development of the risks to the eurozone's fragile recovery, the ECB president said it was still thinking about whether to embrace the unconventional approach to monetary policy used by the Bank of England, the US Federal Reserve and the Bank of Japan. A House of Lords committee has added its voice to those of the IMF and OECD , warning that it would be unwise to conclude that the storm had passed. The eurozone is in the early stages of a recovery from a triple-dip recession, but a report from the Lords economic and financial affairs committee warned that the pick-up was fragile.
The euro fell on the foreign exchanges after Draghi said the ECB's ruling council had discussed how to implement quantitative easing (QE) – the purchase of financial assets to create money – after news this week that the annual inflation rate in the 18-nation eurozone had fallen to just 0.5%. Financial analysts said Draghi was playing for time and hoping to stimulate exports by "talking down" the euro. Draghi attacked the IMF's managing director, Christine Lagarde, after she made the case for immediate QE. "The IMF has been of recent extremely generous in its suggestions on what we should do or not do, and we are really thankful for that," he said. "Frankly, I would like the IMF to be as generous as they have been towards us also with other monetary policy jurisdictions, like for example issuing statements just the day before a [US Federal Reserve] meeting would take place." Despite speculation ahead of yesterday's meeting, the ECB left its key policy rate at 0.25% and declined to take steps that might increase the flow of credit to businesses and households. Concern among some on the ECB council about the threat of a prolonged period of Japanese-style deflation was highlighted by the admission that QE – once considered outside the bank's remit – was now on the table. "All instruments that fall within the mandate, including QE, are intended to be part of this statement," Draghi said. He added that all members of the governing council were "unanimous in its commitment to using all unconventional instruments within its mandate in order to cope effectively with risks of a too prolonged period of low inflation". Trevor Greetham, of Fidelity, said: "ECB president Mario Draghi says the governing council is open to 'unconventional ease' if necessary in order to avoid an overly long period of low inflation or to offset economic problems caused by currency strength or geopolitical risk [a nod to Putin].
"This is more monetary policy on the cheap. The aim is to talk down the euro without actually doing anything."
The OECD said the eurozone was returning to growth amid easing austerity and rising confidence but warned that the improvement remained fragile, with high unemployment and risks posed internally and from outside the currency bloc. "The euro area economies, including those most heavily hit by the crisis, appear to be turning the corner after many years of low and uneven growth," it said in its latest economic survey of the region. The OECD said it was forecasting growth of 1% in 2014 and 1.6% in 2015, following a 0.4% fall in gross domestic product in 2013. It stressed that the eurozone's 11.9% jobless rate would not start to come down until next year. "The risks to these projections have become more balanced but are still on the downside. Downside risks include the uncertain political situation, social tensions and still challenging public finances in many countries which mean that financial market turbulence could flare up again." In its report, the Lords committee said: "It would be unwise to conclude that the storm has passed." It noted that fundamental weaknesses still existed, such as poor growth, huge differences in prosperity between member states, "destructively high" levels of unemployment and growing fears of a deflationary spiral. These weaknesses left the eurozone extremely vulnerable to future shocks.
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