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Foreign Exchange

Jury remains out on ECB deflation-fighting plans

Draghi attempted to convince markets at Thursday’s press briefing that the ECB has officially awarded itself some new monetary policy tools – with the most dramatic being QE – as it frets over the prospect of the eurozone sliding into deflation.

Quantitative easing (QE) is hardly cutting-edge these days, as it has been deployed elsewhere, but its use could still be a game-changer for the euro in that it could create a bear market for the single currency.

However, will it happen?

Mario Draghi, president of the European Central Bank (ECB), is widely credited in the FX markets for being a deft communicator.

Some of his verbal interventions, such as the “whatever it takes to save the euro” speech in July 2012, rank among the most effective in recent memory. It reversed the existential crisis rapidly engulfing the then floundering euro.

So was Thursday’s press briefing one of those moments?

Draghi let it be known: “The [ECB’s] governing council is unanimous in its commitment to using also unconventional instruments,” adding that measures such as QE have been actively considered.

The ECB attempted to convince markets all manner of policy tools are now up for grabs. It is concerned the eurozone might be teetering on the edge of a deflationary abyss – where economies stagnate as consumers delay purchases and companies investment plans.

Apart from QE, there’s the potential for negative deposit rates, currently at zero, through to more variations on the theme of refinancing operations for banks.

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