“The Governing Council strongly emphasizes that it will maintain an accommodative stance of monetary policy for as long as necessary,” Draghi told reporters in Frankfurt today after the ECB kept its key rate at a record low of 0.25 percent.
Draghi is refusing to say the fight against Europe’s debt crisis is won, even as stocks and bonds rally and countries such as Ireland and Portugal return to the debt market. The economy is still struggling to grow amid subdued prices and the threat of rising market rates as the U.S. Federal Reserve tapers its own monetary stimulus.
“It’s a recovery that’s gone from being based exclusively on export growth” to one that is “very gradually extending into domestic demand,” Draghi said. “But it’s still premature to declare any victory.”
The ECB’s decision to keep borrowing costs unchanged today was predicted by all 51 economists in a Bloomberg survey. The deposit rate stayed at zero and the marginal lending rate was left at 0.75 percent. The euro dropped after Draghi’s comments, falling as low as $1.3549 from around $1.3614 at the start of the press conference. The yield on German two-year bonds slid 2 basis points to as low as 0.197 percent.
More Rate Cuts
“The ECB today chose to stress so emphatically the importance of maintaining a high degree of monetary accommodation and stressed also its willingness to deliver further decisive action,” said Ken Wattret, chief euro-area market economist at BNP Paribas SA in London. “It tells us that the ECB continues to be rattled by the uncomfortably low level of inflation and the potential for downside risks to materialize.”
Draghi said the use of “firmer words” in his opening statement today “reiterates our decisiveness to act if needed.” The phrase “strongly emphasizes” wasn’t used in last month’s communique, and other new language include a “firm” reiteration of the ECB’s forward guidance.
His comments highlight the risk the euro-area’s fragile economic recovery could yet be derailed as improving confidence indicators and narrowing bond spreads are countered by subdued inflation and depressed lending. Draghi specified two factors that could prompt the ECB to cut rates again.
“One is an unwarranted tightening of the short-term money markets, and the other is a worsening of our medium-term outlook for inflation,” he said. “That is what this firmer language is addressing.”
European money-market rates have risen since the Fed cut its monthly asset purchases to $75 billion from $85 billion in December, citing an improvement in the labor market. Policy makers will gather Jan. 28-29 to consider the next step in their strategy of gradually reducing the pace of bond buying.
Market rates declined after Draghi’s comments. The overnight cost for borrowing money by the ECB meeting a year from now slipped to 0.19 percent from 0.21 percent. At the ECB’s last meeting in December, the rate was 0.14 percent.
Euro-area inflation was at 0.8 percent in December and has been below the ECB’s 2 percent ceiling for 11 months. While it’s forecast to continue to undershoot the target through next year, Draghi said in an interview with German (GDBR2) magazine Der Spiegel released on Dec. 28 that “at the moment there’s no immediate need to act.” The last rate cut was in November.
He denied that the euro area is heading for a Japan-style period of deflation, saying Europe’s plan to build a banking union will bolster confidence. Leaders agreed in 2012 to set up the union with the goal of severing the financial links between lenders and sovereigns that fueled the region’s debt crisis and almost toppled the currency bloc.
The ECB will become the euro area’s bank supervisor in November as the first part of that union. In the meantime, it is conducting a three-stage review, known as the Comprehensive Assessment, to identify any capital shortfalls on the balance sheets of the region’s biggest lenders.
“The surprise at the ECB press conference was not the substance of the comments, it was the choice of unusually clear and strong words,” said Holger Schmieding, chief economist at Berenberg Bank in London. “The ECB wants to communicate a message: we will not allow the euro zone to get closer to any deflation risk. The ECB will do all it can to prevent downside risks to the economic recovery and to price stability.”
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