European Markets Tumble On Draghi’s Dovish Comments

After the Euro zone economy started showing early signs of improvement, certain dovish comments by ECB President Mario Draghi have spurred a fall in the Euro markets. In the latest policy meeting, the ECB Chief said that Europe is now ready for action on the monetary policy front and that there could be movement on either side in the interest rates. The ECB may raise the rates or could also pump more money in the system if required. For now, however, the ECB has kept the rates unchanged.

Draghi also said that the Euro zone’s economy will shrink 0.4% this year. This is an improvement from the June 2013 forecast, which indicated that the Euro economy will shrink by 0.6%. The central bank, however, also lowered the growth outlook on the economy to 1% in 2014 against the previous forecast of 1.1%, indicating a very weak recovery in the economy. The inflation forecast for 2013, however, has been raised to 1.5% from 1.4%. The 2014 inflation forecast remains unchanged at 1.3%.

The ECB Chief has declined any possibility of giving a stimulus package to Greece despite the Euro zone finance ministers admitting that the troubled Greece would need additional funds next year. He has also ruled out any possibility of debt restructuring in Europe.

Draghi’s comments have been viewed negatively by the European markets, which are down for the second day in succession. His comments come just two weeks ahead of the US Fed’s September meeting, in which it would be clear whether or not the Fed is cutting down on QE sooner than expected. The US unemployment data due today would strengthen the case for the US Fed to rewind its ongoing USD 85 billion a month monetary stimulus package, or the so called QE 3.0.