Draghi Signals ECB May Consider Another Rate Cut If Needed

European Central Bank President Mario Draghi signaled policy makers may be open to another interest-rate cut if the economic outlook warrants it.

“We have to look at what the situation is, the data and the developments, and then we will make up our minds on the Governing Council what to do,” Draghi told lawmakers in Brussels today when asked if the central bank could cut rates again. While the ECB never pre-commits, it will “do everything to maintain price stability -- from both sides -- in the euro area,” he said.

The ECB last week cut its main interest rates by 25 basis points, taking the benchmark to a record low of 0.75 percent and the deposit rate to zero. Policy makers next decide on rates on Aug. 2. With the sovereign debt crisis threatening to tip the 17-nation euro economy into recession, some economists say the ECB may have to resort to unorthodox methods to stimulate growth.

“It would take a negative deposit rate, or the start of quantitative easing, to provide fresh stimulus,” said Nick Kounis, chief European economist at ABN Amro Bank NV in Amsterdam. “Both are areas where the ECB might not be willing to go at this stage.”

ECB staff are “searching for actions that could attenuate the current crisis,” as long as they don’t breach the central bank’s inflation-fighting mandate, Draghi said.

Risks ‘Materialized’

He said last week’s rate cut “took account of further dampening of inflationary pressures, as some of the previously identified downside risks to economic activity materialized.”

“Indicators for the second quarter of 2012 point to a weakening of growth and heightened uncertainty,” Draghi said. “But looking ahead, we continue to expect the euro-area economy to recover gradually, albeit with dampened momentum.”

Draghi was asked about plans to allow the permanent bailout fund, the European Stability Mechanism, to directly recapitalize troubled banks without adding to governments’ debt burdens. He said it won’t be a problem if the ESM isn’t able to do that this year because markets will understand that any recapitalizations in the meantime will only temporarily impose a cost on sovereigns.

“It would be perceived as a temporary blip,” Draghi said. Markets “would know that as soon as the ESM enters into force, it would replace public debt with ESM money.”

‘Here to Stay’

Draghi said “the euro is here to stay” and identified four main building blocks that are required to put the monetary union on a sound footing in the longer term.

The first is a financial market union that elevates responsibility for supervision of banks to the euro-area level. The second is a fiscal union that reinforces oversight of budgetary policies at the euro-area level “and also provides some fiscal capacity to support the functioning of the currency area,” Draghi said.

The third is an economic union with sufficient mechanisms to ensure that countries can achieve sustained prosperity without excessive imbalances. “And finally, a political union that strengthens the legitimacy” of the currency union among citizens “and deepens its political foundations,” he said.

To achieve this, it’s “essential” that euro-area governments give up some sovereignty, Draghi said, adding that common euro bonds “come at the end of this process.”