Draghi Says Geopolitical Risks to Economy Increasing
Mario Draghi said risks to the euro area’s economic recovery are increasing because of conflicts such as the Ukraine crisis.
“Heightened geopolitical risks, as well as developments in emerging-market economies and global financial markets, may have the potential to affect economic conditions negatively,” the European Central Bank president told reporters in Frankfurt today after policy makers kept interest rates unchanged. “We are strongly determined to safeguard the firm anchoring of inflation expectations over the medium to long term.”
Russia’s territorial dispute with Ukraine has led to the worst standoff between Russia and the U.S. and its allies since the Cold War, strengthening headwinds for the 18-nation currency bloc as growth shows signs of faltering. Draghi has in the past said an external shock to the economy that endangers the inflation (ECCPEMUY) outlook could be a trigger for broad-based asset purchases, or quantitative easing.
“The Governing Council is unanimous in its commitment to use unconventional policy measures like ABS purchases, like QE, if our medium-term outlook for inflation were to change,” Draghi said. “We will closely monitor the possible repercussions of heightened geopolitical risks and exchange-rate developments.”
The 24-member Governing Council left the main refinancing rate at 0.15 percent, as predicted by all 57 economists in a Bloomberg News survey. The deposit rate and the marginal lending rate remained at minus 0.1 percent and 0.4 percent, respectively.
The euro weakened against the dollar and traded at $1.3353 at 5:19 p.m. Frankfurt time, near the lowest level in nine months. Draghi said the “fundamentals” for a weaker euro are now much better after a barrage of stimulus measures announced in June. ECB and U.S. monetary policy will remain on divergent paths “for a long period of time,” he said.
Russia has massed troops on its border with Ukraine and President Vladimir Putin imposed import bans on an array of food goods from the U.S. and Europe today. The curbs target nations that have ordered or supported sanctions against Russia and also include Canada, Australia and Norway.
“There is no doubt that if you look at the world today, you’ll see that geopolitical risks have increased all over the world: we have the Russian-Ukrainian crisis, Iraq, Gaza, Syria, and Libya,” Draghi said. “And some of them, like the situation in Ukraine and Russia, will have a greater impact on the euro area than they certainly have on other parts of the world.”
At the same time, Draghi said that the interconnections between the euro area and Russia and Ukraine appear to be of a “very limited” nature. It’s “hard to assess the impact at the beginning of these crises,” he said.
The ECB president said recent economic data have been disappointing, pointing to a “weak, fragile” recovery. Italy, the currency bloc’s third-largest economy, unexpectedly slipped back into recession last quarter, while factory orders in Germany, the largest economy, dropped in June by the most since 2011. The Economy Ministry in Berlin cited geopolitical tensions as damping the outlook.
Draghi said the euro area remains on track for a moderate, if uneven, recovery. Inflation in the region was 0.4 percent last month, the slowest pace in almost five years. That compares with an ECB goal of just under 2 percent.
“If one wants to detect a sign in the last two or three months’ data, there has been a slowing down of growth momentum,” he said, adding that the the trend reinforces the need for structural reforms. “It’s pretty clear that the countries that have undertaken reforms are performing better, much better, than the countries that haven’t done so.”
The ECB president said targeted long-term loans that start next month will provide between 450 billion euros ($600 billion) and 850 billion euros of funding to banks, which should drive an expansion of credit to the real economy.
“They are not only enhancing our monetary-policy stance, but they also give confirmation to our forward guidance,” Draghi said. “We do expect a sizable pickup.”
Draghi said the ECB is proceeding with developing a program that may see it buy asset-backed securities, and that the central bank will shortly hire a consultant to assist. The work will continue even as the central bank calls for the regulatory changes it says are necessary.
“The work we are doing is with the expectation that we will take action in this field,” Draghi said. “One of the major impediments to this is present regulation.”
Draghi has long trailed an ABS plan that would help rebuild the market for securitized loans in the region, a sector he once described as “dead.” The ECB is attempting to create a new, high-quality asset-class that is different from the ABS assets that helped worsen the global financial crisis.
“They are not going to be a sausage full of derivatives,” he said.