Sunday 15 September 2019

Draghi binds ECB to indefinite stimulus policy

Last act: Mario Draghi, President of the European Central Bank, departs after speaking to the media following a meeting of the ECB governing board
Last act: Mario Draghi, President of the European Central Bank, departs after speaking to the media following a meeting of the ECB governing board
Donal O'Donovan

Donal O'Donovan

The European Central Bank (ECB) yesterday cut growth projections for this year and 2020, and its inflation forecasts for the next three years.

The stark warning was a curtain-raiser for a fresh round of financial stimulus the ECB board approved yesterday, where they cut interest rates and approved a new round of bond purchases to prop up eurozone growth and reverse drop in inflation expectations.

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The ECB cut its deposit rate to a record low -0.5pc from -0.4pc and will restart bond purchases of €20bn a month from November, it said in a statement.

The latest move was expected and stopped short of the even more radical step of cutting the official lending rate below zero.

But it means a year-long attempt by the ECB to wean the eurozone economy off its dependence on monetary support has been abandoned.

The outgoing ECB President Mario Draghi pledged indefinite stimulus on Thursday, effectively tying the hands of his successor for years to come and sparking an immediate conflict with US President Donald Trump.

"You remember me saying that all instruments were on the table, ready to be used. Well, today we did it," Mr Draghi told a news conference.

As Mario Draghi's eight-year term ends, the ECB cut rates deeper into negative territory and promised bond purchases with no end-date. The aim being to push borrowing costs even lower, in hope of kick-starting the bloc nearly a decade after its debt crisis.

The bigger-than-expected stimulus will increase pressure on the US Federal Reserve and Bank of Japan to ease policy next week to support a world economy increasingly characterised by low growth and protectionist threats to free trade.

Yet there were doubts as to whether the ECB measures - most of the few remaining tools in its monetary policy arsenal - would be enough to boost a eurozone recovery in the face of a US-China trade war and possible disruption from Brexit.

Mr Draghi acknowledged that the ECB's already gloomy projections did not encompass the possibility of a hard Brexit or a further escalation of the global trade war.

Thursday's moves also infuriated Donald Trump, who just this week called on the US Fed to adopt a negative-rate policy.

"They are trying, and succeeding, in depreciating the Euro against the VERY strong Dollar, hurting US exports.... And the Fed sits, and sits, and sits. They get paid to borrow money, while we are paying interest!" Mr Trump tweeted.

A 10-basis-point cut in the ECB's deposit rate to -0.5pc was fully expected but the revived bond purchases exceeded many expectations because they are set to run until "shortly before" the ECB raises interest rates.

Markets do not expect interest rates to rise for nearly a decade. That means purchases could go on for years, as long as there are enough assets to buy and possibly for all of incoming ECB president Christine Lagarde's 8-year term.

"Today's decisions have anchored and enshrined the Draghi legacy in future ECB decisions," ING economist Carsten Brzeski said.

Additional reporting Reuters

Irish Independent

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