GO
Loading...

'Groundbreaking' Draghi brings cheer to markets

European markets cheered dovish words by Mario Draghi at the start of the week, after the president of the European Central Bank (ECB) delivered a wide-ranging speech which many deemed to mark a key turning point in rhetoric.

Draghi's comments, at the Jackson Hole meeting of central bankers in Wyoming on Friday, raised expectations of further policy easing by the central bank. Hopes of further stimulus pushed stocks in Europe higher on Monday.

The euro, meanwhile, stumbled to 1.3189 against the dollar - a level not seen since September 2013. German sovereign bond yields also eased lower amid expectations that the ECB could begin a major asset-buying program.

"This could actually go down as one of the major speeches by Draghi, signaling another potential policy shift that is in the making," Christoph Rieger, head of fixed-income strategy at Commerzbank, told CNBC on Monday morning.

Read MoreFears of slowdown as German business morale drops

Taking the stage after U.S. Federal Reserve Chair Janet Yellen on Friday, Draghi's words on weak inflation in the region were of particular interest to analysts. Notably, the ECB President bulked out his speech and drifted away from pre-prepared comments.

Draghi cited the risks of a further drop in euro zone inflation, which stood at just 0.4 percent in July, and said the bank would use all available instruments within its mandate to ensure price stability over the medium term. He also highlighted that market-based long-term inflation expectations had recently fallen.

Mario Draghi, president of the European Central Bank (ECB).
Melmet Kaman | Anadolu Agency | Getty Images
Mario Draghi, president of the European Central Bank (ECB).

QE ahead?

Philippe Gudin, an economist at Barclays, called Draghi's speech a "major breakthrough", and said his comments on inflation were a sign the bank could be readying additional easing measures in the near term, such as a quantitative easing (QE) program.

"This speech represents a significant breakthrough in the ECB rhetoric and will probably have significant implications regarding the debate just about to start between European governments on policies that need to be deployed to avoid a 'triple-dip recession' and a fall in outright deflation," he said in a research note on Sunday evening.

Gudin noted that Draghi urged for action on both sides of the economy – the demand and supply side - which he said marked a turning point in the ECB's rhetoric.

"This is probably the first time that an ECB president has argued that aggregate demand needs to be boosted," Gudin added.

Read MoreFedand ECB: Spot the difference

Economists at Barclays said they now believe there is more chance of outright QE being delivered by Draghi, although they do not expect any further announcement before the year-end.

Danske Bank analysts agreed. They pointed out that the central bank chief left out some crucial caveats when speaking about QE – which he has previously mentioned – indicating a higher chance of an asset purchase scheme being launched.

Japanese investment bank Nomura revised its call on ECB monetary policy on Monday, predicting a 60 percent chance that all key interest rates will be reduced by a further 10 basis points at the central bank's September 4 meeting.

Buy Spanish debt?

The euro zone's economic recovery has struggled to take hold in the wake of a sovereign debt crisis, and the ECB has kept interest rates at record lows in the hope of boosting lending.

In June it announced a slew of accommodative policies, but economic data continues to disappoint. Gross domestic product was flat for the euro zone in the second quarter, while Italy fell back into recession and Germany's economy contracted.

On Monday the soft data continued, with the Ifo Business Climate index, which measures German business sentiment, falling for the fourth consecutive month.

Read MoreDraghi says ECB stands ready to adjust policy further

Bill Gross, Pimco founder and CIO, said he believed that Draghi needed to suggest the ECB will remain accommodative for a long time - even when the Fed and Bank of England are looking to reverse their policies and hike interest rates.

Structural reforms can help to a certain extent, Gross said, but added that an asset purchase program would drive down the euro and boost competitiveness.

Commerzbank's Rieger, meanwhile, suggested that investors should be looking to add to their exposures of German bonds on any future price dips, and told CNBC that Spanish sovereign debt was also attractive and would continue to outperform the market.

Contact Europe News

  • CNBC NEWSLETTERS

    Get the best of CNBC in your inbox

    To learn more about how we use your information,
    please read our Privacy Policy.
    › Learn More

Europe Video