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    Euro drops 1% after Draghi suggests possibility of further ECB easing in March

    The European Central Bank made no surprises when it decided to keep monetary policy unchanged today at its first meeting of the year. January’s decision comes just six weeks after the ECB cut its deposit rate to -0.3% and extended the duration of its asset purchase program by 6 months.

    However, at the press conference that followed today’s announcement, Mario Draghi, President of the ECB, was keen to stress that the downside risks to the Eurozone economy and price stability had increased since the last meeting. The continued fall in oil prices, increased uncertainty in China and other emerging market economies and volatility in financial markets are likely to suppress Eurozone growth and inflation prospects.

    In similar fashion to October’s press conference when Draghi hinted at further easing in the upcoming December meeting when the latest economic projections would become available, Draghi again opened the door for a review of ECB policy at the March meeting when it will have the updated ECB staff projections. The euro immediately fell in currency markets after the comments as it raised the prospect of more easing as early as March. Analysts had largely pared back expectations of further action anytime soon after the December easing, which had left markets disappointed by the size of the stimulus.

    Draghi pointed to the 40% fall in oil prices since the time when the last projections were made and said there appears to be some correlation between inflation expectations and present headline inflation, which is being driven by oil prices. The weakened outlook for inflation comes at a time when growth momentum is improving across the Eurozone (which is partly attributed to falling energy prices) but recent global developments could dampen growth.

    The ECB now expects inflation to be significantly lower during 2016 (around 0%) and to only pick up towards the end of the year. Draghi reiterated the ECB’s willingness to use all instruments within its mandate to ensure that inflation rises towards the 2% target as quickly as possible. Although at today’s meeting, the Governing Council did not discuss any instruments, they were unanimous in their stance to review and possibly reconsider their policy in March. Draghi was also defensive of the December measures, saying it was the appropriate decision based on the prevailing circumstances at the time.

    The euro plunged to 1.0777 dollars from around 1.09 dollars prior to Draghi’s press conference. But it managed to make a partial rebound to 1.0823 dollars in late European trading. Against the pound, the single currency dropped to 0.7640 before recovering slightly to 0.7663 pounds. While against the yen, it hit a low of 126.16 yen before bouncing back to 126.77 yen.

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