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FTSE shrugs off Draghi's 'monetary policy on the cheap'

by Daniel Grote on Apr 03, 2014 at 15:37

FTSE shrugs off Draghi's 'monetary policy on the cheap'

The FTSE shrugged off any disappointment at the European Central Bank's decision to keep interest rates unchanged at 0.25% and not embark on any extreme monetary policies such as 'quantitative easing' (or printing money) despite fears of deflation in the eurozone.

Markets had expected Mario Draghi to sit on his hands, and the ECB president duly delivered, despite inflation having fallen to 0.5%, well below the bank's target of just under 2%. The FTSE 100 traded at 6,659, unchanged on the day.

Draghi did however signal the ECB could take action if the situation worsened. 'We will monitor developments very closely and will consider all instruments available to us,' he said, leaving the door open to stimulus action.

'We are resolute in our determination to maintain a high degree of monetary accommodation and to act swiftly if required. Hence, we do not exclude further monetary policy easing and we firmly reiterate that we continue to expect the key ECB interest rates to remain at present or lower levels for an extended period of time.'

Trevor Greetham of fund group Fidelity Worldwide Investment said Draghi was enacting 'monetary policy on the cheap' and was aiming to 'talk down the euro without actually doing anything'. The euro fell to $1.3711, a loss of 0.4% on the day, following Draghi's news conference.

'There’s still a fairly high threshold to action in my view,' he said. 'The ECB knows that shoring up the euro area is unfinished business and systemic risk could rise again. Starting quantitaive easing when growth is good and confidence is high wastes the possible usefulness of such an announcement during a time of stress.'

Will he, won't he? All eyes on Draghi

10.38: The FTSE edged higher as investors awaited the results of today's European Central Bank (ECB) meeting, adding just 11 points, or 0.2%, to 6,670.

The ECB is meeting this lunchtime against a backdrop of slowing inflation in the eurozone, sparking fears over deflation. Inflation fell to a lower-than-expected 0.5% in March, down from 0.7% in February.

However, the market is not expecting a change in policy from the ECB, in spite of comments from Bundesbank president Jens Weidmann last week that quantitative easing in the eurozone was not 'out of the question'. A Reuters poll of 22 money market traders found 18 thought there would be no change of policy, while a survey of economists last week showed only two of 72 thought the ECB should take action.

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