Draghi nudges ECB toward bond buying on deflation risk

By Simon Kennedy & Alessandro Speciale

Mario Draghi just pushed the European Central Bank closer to quantitative easing.

With euro-area data this week likely to show the weakest inflation since 2009, the ECB president used the high-powered central-banking conference in Jackson Hole, Wyoming, to warn that investor bets on prices have “exhibited significant declines.”

Stocks rose and bond yields dropped with the euro today as the comments fanned speculation the ECB is finally heading for a form of monetary stimulus it has long avoided. Draghi has previously said that a worsening of the medium-term inflation outlook would provide a reason for broad-based asset purchases.

The Aug. 22 speech “was a major event and marked a turning point in ECB rhetoric,” said Philippe Gudin, chief European economist at Barclays Plc in Paris. “We think the recent economic developments have increased the chance of outright QE as the next step.”

Euro-area inflation slowed to 0.3 percent this month, a fraction of the ECB’s goal of just under 2 percent, according to the median forecast in a Bloomberg News survey ahead of an Aug. 29 report. Other releases this week are predicted to show unemployment sticking close to a record high and economic confidence falling. Data today showed business confidence in Germany, the region’s biggest economy, slid for a fourth month.

‘Stand Ready’

Draghi showed his concern in his Jackson Hole speech by singling out his preferred gauge of inflation expectations. The 5-year, 5-year inflation swap rate fell below 2 percent this month for the first time since October 2011, according to data compiled by Bloomberg.

“The Governing Council will acknowledge these developments and within its mandate will use...