Euro Dives After ECB Governor Says They May Do QE

Peter Praet ECP EuropeanREUTERSPeter Praet.

European Central bank governor Peter Praet told the Wall Street Journal that all options were on the table at the ECB for further monetary easing, and the euro just took a dive.

The WSJ’s Brian Blackstone has the story:

“If our mandate is at risk we are going to take all the measures that we think we should take to fulfil that mandate. That’s a very clear signal,” ECB executive board member Peter Praet said in an interview Tuesday with The Wall Street Journal. Annual inflation in the euro zone slowed to 0.7% in October, far below the central bank’s target of just below 2% over the medium term.

He didn’t rule out what some analysts see as the strongest, and most controversial, option: purchases of assets from banks to reduce borrowing costs in the private sector. “The balance-sheet capacity of the central bank can also be used,” said Mr. Praet, whose views carry added weight as he also heads the ECB’s powerful economics division. “This includes outright purchases that any central bank can do.”

Right now, it’s trading right around $US1.3400 versus levels around $US1.3450 prior to the comments hitting the tape, down 0.25% against the U.S. dollar.

Seasoned ECB-watcher Lorcan Roche Kelly backs up Blackstone’s claim that Praet’s views carry added weight:

Last week, the ECB surprised market participants by cutting its benchmark refinancing rate to 0.25% from 0.50%. Many expected such a move in December, but few predicted it would come at the November meeting.

“We think that the arguments for rate cuts have been strengthened, but a quarter-point cut in the policy rate might be too little to stave off deflation risks,” says Jan Häggström, head of economic research at Svenska Handelsbanken in Stockholm. “There is much to be said about the risks of quantitative easing, but it is quite clear that the growth outperformance of the U.S., U.K. and Japan relative to the eurozone has something to do with the fact that their central banks have been massive buyers of bonds and the ECB has not.”

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