Monday

16th Sep 2019

ECB disappoints despite rates cuts and stimulus programme

  • Draghi: "We are doing more because it works, not because it fails." (Photo: ECB)

The European Central Bank (ECB) decided on Thursday to fix interest rates at a record low of -0.30 percent and to extend for three months its stimulus programme for the eurozone economy.

The bank will continue to buy €60 billion in bonds each month – an operation known as quantitative easing (QE) – to boost growth and target a close to two percent inflation rate. It will extend the scheme to bonds issued by regional and local authorities.

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"Today’s decisions reinforce the momentum of the euro area’s economic recovery and strengthen its resilience against recent global economic shocks," ECB president Mario Draghi said at a press conference.

But the move disappointed markets who expected more dramatic decisions.

After Draghi's announcement, London and Milan stock exchanges were down 1 percent, while in Frankfurt and Paris exchanges lost around three percent.

In the meantime, the euro was up two percent against the dollar, as a sign of less attractiveness for investors.

"The ECB wants to systematically surprise investors, but it is now short of tools," an economist at Saxo Bank was quoted as saying by Le Figaro newspaper.

"Deposit rate can be lowered further, QE can be extended, or diversified, but there will be little chance that these measures have enough impact on macroeconomy to durably restart growth," he said.

"We are doing more because it works, not because it fails," Draghi told the press. "The cut we decided today is adequate."

'Sluggish pace of reforms'

"We’re not excluding the use of all other instruments if we were to decide they were the right ones to do,” he added.

Draghi said "there was a very large majority in favour of these measures" at the ECB governing council, thus admitting dissensions between governors.

The ECB chief also implicitly admitted the limits of his policies when he said he expected inflation in the eurozone to reach 0.1 percent in 2015, one percent in 2016 and 1.6 percent in 2017, far from the "below but close to two percent" target set in the ECB mission.

Draghi noted that "the economic recovery in the euro area continues to be dampened by subdued growth prospects in emerging markets and moderate global trade."

He also mentioned "the necessary balance sheet adjustments in a number of sectors and the sluggish pace of implementation of structural reforms."

"In order to reap the full benefits from our monetary policy measures, other policy areas must contribute decisively," he said.

"Given continued high structural unemployment and low potential output growth in the euro area, the ongoing cyclical recovery should be supported by effective structural policies," he said.

Once again, he put the onus on political authorities, for "a swift and effective implementation of structural reforms" as well as "fiscal policies [that] support the economic recovery, while remaining in compliance with the fiscal rules of the European Union."

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