Markets rise sharply in belief ECB president will move towards negative interest rates and further QE to ease deflation fears

Mario Draghi, president of the European Central Bank, has helped calm jittery financial markets by saying he would not hesitate to take fresh action to boost eurozone growth and inflation.

Stock markets across Europe, which were already rallying after a turbulent start to 2016, ended the day sharply higher in the belief Draghi would deliver on his pledge at the ECB meeting next month.

Financial markets believe Draghi will respond to fears of deflation and volatile share prices by pushing interest rates into negative territory and expanding the ECB’s quantitative easing programme.

Draghi has financial markets hoping bad news is really good news Read more

Draghi dropped the broadest of hints in testimony to the European parliament that further stimulus was imminent. “The ECB is ready to do its part,” he said, adding that the bank was looking at the low level of inflation and whether enough money was getting through from the banks to the eurozone economy.

“If either of these two factors entail downward risks to price stability, we will not hesitate to act,” Draghi said.

He was speaking after the Chinese stock market opened for the first time in five days, during which global financial markets were rocked by fears of a rerun of the 2008 banking crisis. It held steady, helped by a 7% increased in Japan’s Nikkei 225, which posted its second-biggest one-day gain in three years.

The rally in Japan was prompted by weaker than expected growth figures, which led to speculation that the Bank of Japan would also step in to shore up the economy.

The rally had already helped set a positive tone for European markets, which rose further after Draghi spoke. The FTSE 100 closed 2% higher at 5,824.28 with Germany’s DAX gaining 2.7% to 9,206.84, and France’s CAC 40 rising 3% to close at 4,115.25.

In the UK, Ian McCafferty, who sits on the Bank of England’s rate-setting body, the monetary policy committee, was also indicating that Threadneedle Street could act.

Despite the environment of low interest rates, which might hamper policymakers’ ability to inject stimulus, McCafferty said: “I certainly don’t believe we are out of ammunition.”

There was scope to cut interest rates and revive its bond-buying programme if the economy lurches downward, or even impose negative interest rates. Speaking to the Wall Street Journal, McCafferty, who had been voting for a rate rise until this month, said: “I think an immediate rate rise isn’t as necessary as I had felt last autumn.”

Next month is the seventh anniversary of the Bank of England’s decision to lower official interest rates to 0.5%. Until recently, Threadneedle Street has been wary of pushing borrowing costs any lower for fear of the impact it might have on building societies, a concern that has now receded.

Amid fears for the health of the banking sector, particularly in Italy, Draghi tried to allay concerns. “In the euro area, the situation in the banking sector now is very different from what it was in 2012,” he said.

Draghi made his comments as some financial institutions responded to the poor start for 2016 by revising down their growth forecasts. At Axa, the forecasts for global GDP for 2016 were cut to 2.7%, down from 3.1%, while analysts at Berenberg said the slower start to the year had forced it to reduce its 2016 forecast for the US to 2.1%, from 2.3%. The Berenberg economists cut their predictions for eurozone GDP from 1.6% to 1.3%, citing market turmoil that was hitting sentiment.