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03 May 2012

Bloomberg: ECB may soften stance as Draghi’s recovery falters


Since the European Central Bank President predicted an economic recovery at the start of the year, data have increasingly pointed to a deepening recession.

Draghi toned down his inflation-fighting rhetoric and sounded more cautious on the economic outlook, fuelling speculation that he could ease monetary policy further.

In the first three months of this year, Draghi said survey data showed a “tentative stabilisation” of economic activity at low levels and, while noting the outlook was subject to downside risks, predicted a gradual recovery.

The ECB is due to issue new projections next month. In March, it revised down its 2012 economic outlook to a contraction of 0.1 per cent from an expansion of 0.3 per cent. The central bank also raised its 2012 inflation forecast to 2.4 per cent from 2 per cent, and started to warn of “upside risks” to price stability, indicating policy-makers didn’t intend to ease policy further.

Draghi changed his stance last week. Delivering a policy statement to lawmakers in Brussels on April 25, he dropped any mention of upside inflation risks, omitted reference to an economic recovery, and called on politicians to agree on a “growth compact".

The ECB has shelved its government-bond purchase programme, and hinted it doesn’t want to offer banks another round of three-year loans. A cut in the benchmark rate would take it into uncharted territory below 1 per cent, and raise the issue of whether to take the 0.25 per cent deposit rate to zero.

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