No surprises from Draghi – but ECB stands ready to act

2/6/2016

By Martin Wolf

Rates decision suggests policy is proving effective yet further action is likely, writes Martin Wolf

The European Central Bank has made the following announcement:

“At today’s meeting, which was held in Vienna, the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00 per cent, 0.25 per cent and -0.40 per cent respectively.

“Regarding non-standard monetary policy measures, on 8 June the Eurosystem will start making purchases under its corporate sector purchase programme. Moreover, starting on 22 June, it will conduct the first operation in its new series of targeted longer-term refinancing operations.”

This standstill on new policy announcements should come as no surprise. As Mario Draghi, president of the ECB, emphasised in his press conference, the eurozone economy is recovering, with 0.5 per cent economic growth in the first quarter of 2016. Moreover, domestic demand is driving this growth. That shows the effectiveness of measures already taken by the ECB. Policy also remains strongly accommodative, with ultra-low interest rates, continuing asset purchases, and planned implementation of new measures, such as the corporate sector purchase programme.

Yet, as Mr Draghi also noted, inflation is still not expected to hit the 2 per cent target any time any time before the end of the forecast horizon in 2018. Thus, while policy is showing positive effects, the ECB stands ready to take further measures if necessary. Further measures are, indeed, quite likely.

He indicated, once again, a wistful desire for governments to adopt structural and fiscal policy measures (the latter within the eurozone fiscal rules) that would assist the ECB in meeting its targets more swiftly. Nevertheless, inflation is ultimately a monetary phenomenon, he stressed. The ECB is committed to meeting its target and would do so in the end.

Mr Draghi rejected suggestions that the ECB should change its target, instead. Any such shift, either up or down, would raise risk premiums: if the ECB could change its target once, it could do so again. If it were to lower its target, that would at once raise real interest rates and so further dampen the recovery. If it were to raise its inflation target instead, it would inevitably damage credibility, since the ECB has been unable to hit its present target for many years.

He also rejected the idea that the ECB was responsible for the ultra-low interest rates. Those were, instead, a symptom of the weak economy, for which an excess of savings over investment was responsible. The problem would go away when the economy recovered — so “for interest rates to be higher, they must be lower today”.

Only one question to Mr Draghi related to Brexit. On this, he remarked: “The ECB is ready for any outcome”; and “The UK and Europe and the eurozone are mutually beneficial. The ECB has a view that the UK should remain in the European Union, because the European Union would benefit from its presence. And we believe the UK would benefit from being in the European Union too.”

Mr Draghi is a sensible man. He is not going to intervene further in the British debate. He can only wait and watch.

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