Sun | Sep 24, 2023

European Central Bank hints at stimulus

Published:Tuesday | June 18, 2019 | 12:28 PM
European Central Bank President Mario Draghi.
European Central Bank President Mario Draghi.

The European Central Bank could unleash more stimulus if the economy does not pick up soon, its president warned Tuesday, sparking a sharp drop in the euro.

Mario Draghi told a conference in Sintra, Portugal, that the ECB was not resigned in its quest to perk up the economy and said that "in the absence of improvement ... additional stimulus will be required."

Europe's top banker even held out the prospect of cutting interest rates, though they are already at record lows.

"Further cuts in policy rates ... remain part of our tools," he said. Draghi noted it was also possible to re-start a bond-buying stimulus programme that had been halted only in December.

Investors read the comments as a clear step toward more stimulus in coming months, causing stock markets to rally and sending the euro lower against the dollar.

Draghi's statement drew an angry tweet from United States President Donald Trump, who wrote on Twitter that the lower euro was "making it unfairly easier for them to compete against the USA."

Asked about the tweet by a conference moderator, Draghi said the European Central Bank was ready to use all available tools to achieve its mandate of stable prices and that "we do not target the exchange rate."

The euro traded at US$1.1187 by late afternoon in Europe, down from US$1.1241 before Draghi's speech. Germany's main stock index surged over 2 per cent.

Rate cuts and monetary stimulus are aimed at loosening credit for businesses and consumers and at the same time can send a currency's exchange rate lower. Since stimulus measures can do both, it can be a matter of debate about how much intent there was to lower the currency. A weaker euro can give European exporters a price advantage over US businesses.

Talk of re-starting stimulus comes only six months after the ECB phased out a €2.6 trillion (US$2.9 trillion) bond-purchase program that pumped new money into the economy over almost four years in an attempt to drive inflation higher.

The ECB's shift to a pro-stimulus stance mirrors that of the US Federal Reserve, which has halted a series of interest rate hikes. Fed Chair Jay Powell has said that the Fed is prepared to respond if it decides the US-China trade conflict is threatening the US economy. Investors read his remarks as a signal that the Fed will likely cut interest rates this year.

Both the ECB and the Fed, which holds a policy meeting Tuesday and Wednesday, have cited similar reasons for their policy shift — the threat of a softening global economy if Trump and the Chinese don't reach agreement on trade. Any rate cuts by the Fed could in theory add to pressure on the ECB if they result in a weaker dollar against the euro.

Eurozone inflation of 1.2 per cent is below the European Central Bank's goal of just under 2 per cent, considered best for the economy, while growth prospects are under pressure from uncertainty about issues such as the US-China trade dispute, which could lead to more tariffs and less trade. There is also no clarity on the terms of Britain's planned departure from the European Union.

Draghi said that in the absence of stronger inflation "additional stimulus will be required" and that the bank would "use all the flexibility in our mandate" to push inflation toward the goal.

The bank's key policy rates are at record lows: zero for lending to banks and minus 0.4 per cent on deposits left overnight at the ECB by commercial banks. The negative rate is a penalty aimed at pushing banks to lend the money.

The Frankfurt-based ECB sets monetary policy for the 19 European Union countries that have joined the shared euro currency. It tries to steer inflation by adjusting interest rate benchmarks and, if needed, by purchasing financial assets.