Mario Draghi strengthened his stimulus pledge for the euro area by saying the European Central Bank can’t hold back in its fight to revive the economy.

“We will do what we must to raise inflation and inflation expectations as fast as possible, as our price-stability mandate requires,” the ECB president said at a conference in Frankfurt today. Some inflation expectations “have been declining to levels that I would deem excessively low,” he said.

With the next policy meeting less than two weeks away and the region remaining close to economic stagnation, Draghi may need to step up efforts to convince investors he’s serious about reigniting growth and inflation. The euro fell and bond yields dropped on speculation the central bank is closer to buying government debt in a full-scale quantitative-easing program.

“Draghi is sending a clear signal that more stimulus is coming,” said Lena Komileva, chief economist at G Plus Economics Ltd. in London. “If the ECB’s current measures prove underwhelming and inflation expectations fail to recover, the ECB will act to expand QE.”

The euro was down 0.9 percent at $1.2428 at 4:07 p.m. Frankfurt time. The Stoxx Europe 600 Index climbed 2 percent. The yield on Spanish 10-year government debt fell 7 basis points to 2.03 percent, approaching the record low reached last month.

The ECB is trying to boost the size of its balance sheet to early-2012 levels, signaling an increase of as much as 1 trillion euros ($1.24 trillion), to help revive the euro-area economy. Gross domestic product expanded just 0.2 percent last quarter and inflation is running at 0.4 percent, well below the ECB’s goal of just under 2 percent.

David Fuller's view

The rest of this article is also well worth reading.  Mario Draghi, who I have often described as a very smart and diplomatically astute central banker, has proved that he can also be tough when necessary.  In introducing a form of QE, he has had to face down strong opposition from the ECB’s Governing Council member Klaas Knot (appropriately named) and Bundesbank President Jen Weidmann, who can currently be seen in every other CNBC commercial, snarling at Lawrence Summers for saying that Europe’s policies were not working.

People can argue all day long about the economic benefits or damage of QE, and they have been doing so for at least five years.  I suspect this will go on for many more years before there is any chance of a clear consensus on the long-term impact of QE, although I maintain that it will be largely favourable.  However, among investors who are responsible for the performance of portfolios, I suggest this is still an academic argument.

What we do know is that QE is good for share prices.  Ben Bernanke himself told us so on several occasions, after he introduced QE when Chairman of the US Federal Reserve.  Moreover, you and I have seen the evidence for ourselves, and it was no surprise.  We have long known that expansionary monetary policy lifts stock markets, at least until inflationary pressures become a problem, causing central banks to tighten. 

  We can worry about CPI and PPI inflation when it exceeds central bank targets in countries which have used QE to revive consumer confidence.  Meanwhile, I would rather run with the long position stock market hares than hunt with the short-selling hounds in this environment of generally sluggish GDP, low reported inflation, and deflation concerns.  Additionally, a moderate rate of inflation is a tailwind for stock markets. 

EU indices are benefitting from the ECB’s moves, as we can see from these charts: SX5E, DAX, CAC and AEX.  Also, the European region’s UKX continues to push back into overhead supply and SMI is particularly strong.  Closes beneath the lows of the last two weeks would be required to question a further test of this year’s upper boundaries before yearend, or in the case of SMI, more than a brief consolidation before higher levels are seen.