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Draghi Strives to Maintain Credibility of E.C.B. Draghi Strives to Maintain Credibility of E.C.B.
(about 2 hours later)
FRANKFURT — If there was one thing that Mario Draghi wanted everyone to understand on Thursday, it was that the European Central Bank was determined to honor its prime directive: to keep a handle on inflation. FRANKFURT — Mario Draghi wanted everyone to understand on Thursday that the European Central Bank was determined to honor its prime directive: keeping inflation, now dangerously low, in check.
“We have a mandate. We don't tolerate prolonged deviations from our mandate,” Mr. Draghi, the E.C.B. president, said at a news conference. Later, he was even more forceful. “Not to pursue our mandate would be illegal,” he said. “We have a mandate. We don't tolerate prolonged deviations from our mandate,” Mr. Draghi, the bank’s president, said at a news conference. “Not to pursue our mandate would be illegal.”
But it has been almost two years since the eurozone’s central bank last achieved its inflation target of about 2 percent. Inflation has fallen steadily since then, this year to dangerously low levels. It is now close to zero — beyond which would be deflation, the economically dysfunctional condition that no central banker wants to let happen on his watch. But it has been almost two years since the eurozone’s central bank last achieved its inflation target of about 2 percent. Inflation has fallen steadily since then, and it is now close to zero.
So the questions are growing more urgent about how many more meetings of the European Central Bank’s governing council can pass with Mr. Draghi hinting at stimulus actions yet to come before markets lose faith in its ability to do its job. There were already signs of doubt on Thursday, as European stocks were down broadly even before Mr. Draghi’s news conference was over. Mr. Draghi and the central bank didn’t take concrete action on Thursday. Instead, he offered assurances that more aggressive stimulus was just around the corner, perhaps the type of large-scale bond purchases used by the United States Federal Reserve.
“At some point, they will lose credibility,” said Mark Zandi, chief economist of Moody’s Analytics. “They still have time, but time is running out.” The question is how long the European Central Bank and Mr. Draghi can merely hint at actions yet to come. There were already signs of doubt on Thursday, as European stocks were down broadly even before Mr. Draghi’s news conference ended.
Instead of concrete action on Thursday, Mr. Draghi offered further assurances that more aggressive stimulus was just around the corner, probably in the form of large-scale asset purchases similar to the quantitative easing used by the Federal Reserve in the United States and the Bank of England. “At some point, they will lose credibility,” said Mark Zandi, chief economist at Moody’s Analytics. “They still have time, but time is running out.”
Mr. Draghi said that the European Central Bank would reassess its stimulus measures “early next year” and that its governing council “remains unanimous in its commitment to using additional unconventional instruments within its mandate.” Mr. Draghi said that the European Central Bank would reassess its stimulus measures early next year and that its governing council “remains unanimous in its commitment to using additional unconventional instruments within its mandate.”
But that statement was nearly identical to ones that he made in October and November. That statement was nearly identical to ones he made in October and November.
And on Thursday Mr. Draghi refused to specify what kind of assets the central bank was likely to buy, saying only that the governing council had discussed numerous options. He did not commit to action in January, when the governing council next meets on monetary policy. And Mr. Draghi refused to specify what kind of assets the central bank was likely to buy, saying only that many options had been discussed. He did not commit to taking action in January, when the governing council will next meet on monetary policy.
“It doesn’t mean at the next meeting,” he said of the possibility of an asset-purchase program. The decision would depend on how inflation developed and other factors, including the effect of the decline in oil prices. “It doesn’t mean at the next meeting,” he said of the possibility of an asset-purchase program. The decision would depend on how inflation developed and other factors, including the effect of the steep decline in oil prices, he said.
Low inflation can make it difficult for companies to raise prices to cover their costs. That in turn can force businesses to cut wages and discourage them from hiring new people. Deflation can create a self-perpetuating stagnation of the sort that has troubled Japan in recent decades. Low inflation can make it difficult for companies to raise prices to cover their costs. That in turn can lead businesses to cut wages and discourage them from hiring. Deflation can create a self-perpetuating stagnation of the sort that has troubled Japan in recent decades.
The European Central Bank, of course, has not been idle during the past two years. It has cut its benchmark interest rate seven times under Mr. Draghi to its current low of 0.05 percent, or effectively zero. The central bank left the rate unchanged on Thursday. The European Central Bank has not been idle during the last two years. It has cut its benchmark interest rate seven times under Mr. Draghi to its current low of 0.05 percent, or effectively zero. The central bank left the rate unchanged on Thursday.
It has taken the virtually unprecedented stop of introducing a negative interest rate on money that commercial banks store at the central bank, to induce them to lend the funds rather than hoard them. And it has allowed banks to borrow money on extremely favorable terms for up to four years. The central bank is set to issue another round of cheap four-year loans next week. It has taken the virtually unprecedented stop of introducing a negative interest rate on money that commercial banks store at the central bank, to induce them to lend the funds. And it has allowed banks to borrow money on extremely favorable terms for up to four years. The central bank is set to issue another round of cheap four-year loans next week.
One rationale for the European Central Bank’s hesitation to embark on a big bond-buying stimulus program is that it wants to give the earlier measures a chance to work before taking more controversial steps. A decision to buy government bonds, an essential component of a strong quantitative easing program, would be deeply unpopular in Germany and could provoke a split among the 24 members of the governing council. The central bank has also begun a mild form of quantitative easing focused on purchases of bank loans that have been bundled into securities. So far, the purchases have been a tiny fraction of the bank’s planned expansion of its balance sheet, a measure of the volume of its monetary stimulus.
Mr. Draghi said the central bank was prepared to act even if the decision was not unanimous, suggesting that quantitative easing could begin over the objections of Germany. But he also seemed to hold out hope that the Germans on the governing council and other quantitative easing skeptics could be brought on board. The central bank intends to expand the balance sheet by 1 trillion euros, or $1.23 trillion. From Oct. 20, when the purchases began, through Nov. 28, the central bank spent €18.2 billion buying private sector assets.
One rationale for the European Central Bank’s hesitation to embark on a big bond-buying program is that it wants to give the earlier measures a chance to work before taking more controversial steps. A decision to buy government bonds, an essential component of a so-called quantitative easing program, would be deeply unpopular in Germany and could provoke a split among the 24 members of the governing council. Such purchases would also prompt legal challenges.
Mr. Draghi said the central bank was prepared to act even if the decision was not unanimous, suggesting that quantitative easing could begin over the objections of Germany. But he also seemed to hold out hope that the Germans on the governing council and other skeptics could be brought on board.
“We don’t need unanimity,” he said. But he added: “I believe it can be designed to have consensus. I’m still confident.”“We don’t need unanimity,” he said. But he added: “I believe it can be designed to have consensus. I’m still confident.”
He indicated that the planning was already underway, saying, “Technical preparations have been stepped up for further measures, which could be implemented in a timely manner, if needed.”He indicated that the planning was already underway, saying, “Technical preparations have been stepped up for further measures, which could be implemented in a timely manner, if needed.”
Mr. Draghi also had an answer to economists who have questioned whether large-scale asset purchases would be an effective way to lift the inflation rate. The doubters cite the eurozone’s fragmented financial markets and lack of a widely traded, low-risk asset similar to the United States Treasury securities that the Fed has purchased in its quantitative easing program. Mr. Draghi also had an answer to economists who have questioned whether large-scale asset purchases would be an effective way to lift the inflation rate. The doubters cite the eurozone’s fragmented financial markets and lack of a widely traded, low-risk asset similar to the United States Treasury securities that the Fed has bought in its quantitative easing program.
“There is enough evidence to say it could be effective,” Mr. Draghi said of European quantitative easing. “There is enough evidence to say it could be effective,” Mr. Draghi said.
But that statement raised questions about why, in that case, the European Central Bank has not already acted — especially considering that its own economists on Thursday issued more pessimistic forecasts for the eurozone. But that statement raised questions about why, in that case, the European Central Bank has not already acted — especially considering that its own economists issued more pessimistic forecasts on Thursday.
Inflation next year will be 0.7 percent on average, the staff economists said, compared with a forecast of 1.1 percent as recently as September. And growth in the eurozone in 2015 will be only 1 percent, the central bank economists said, compared with an earlier forecast of 1.6 percent. Inflation in the eurozone next year will be 0.7 percent on average, the staff economists said, compared with a forecast of 1.1 percent as recently as September. And growth in 2015 will be only 1 percent, the central bank economists said, compared with an earlier forecast of 1.6 percent.
The central bank has already begun a mild form of quantitative easing focused on purchases of bank loans that have been bundled into securities. So far, the purchases have been a tiny fraction of the bank’s planned expansion of its balance sheet, a measure of the volume of its monetary stimulus.
The central bank intends to expand the balance sheet by 1 trillion euros, or $1.23 trillion. From Oct. 20, when the purchases began, through Nov. 28, the central bank had spent €18.2 billion buying private sector assets.
Investors, who had hoped for more Thursday, quickly registered their disappointment. After Mr. Draghi’s comments, the benchmark Euro Stoxx 50 index fell, closing down about 1.7 percent.
“Mr. Draghi’s ability to buoy financial markets through his words (and his words alone) is diminishing with each passing day,” Nicholas Spiro, managing director of Spiro Sovereign Strategy, said by email. “The E.C.B.'s inability to take meaningful action to avert the threat of deflation could become the trigger for a much more pronounced deterioration in market sentiment towards the eurozone.”“Mr. Draghi’s ability to buoy financial markets through his words (and his words alone) is diminishing with each passing day,” Nicholas Spiro, managing director of Spiro Sovereign Strategy, said by email. “The E.C.B.'s inability to take meaningful action to avert the threat of deflation could become the trigger for a much more pronounced deterioration in market sentiment towards the eurozone.”
The annual rate of inflation in the eurozone last month was 0.3 percent. Inflation is expected to fall further this month, perhaps to zero, because of declines in oil prices.The annual rate of inflation in the eurozone last month was 0.3 percent. Inflation is expected to fall further this month, perhaps to zero, because of declines in oil prices.
The eurozone has narrowly avoided slipping back into recession, but growth remains too weak to make a significant dent in the unemployment rate, which was 11.5 percent in October. The eurozone has narrowly avoided slipping back into recession. But growth remains too weak to make a significant dent in the unemployment rate, which was 11.5 percent in October.
Mr. Draghi and other members of the governing council may be hoping that the drop in oil prices will have a positive effect on economic growth, so that perhaps purchases of government bonds will not be necessary. Such purchases would certainly provoke legal challenges, and could nourish support for right-wing parties in France, Germany and other countries that want to eliminate the euro currency. Mr. Draghi and other members of the governing council may be hoping that the drop in oil prices will help economic growth so that purchases of government bonds may not be necessary. But the longer the bank waits, the greater the risk that low inflation or deflation could become entrenched.
But the longer the E.C.B. waits, the greater the risk that low inflation or deflation could become entrenched.
“The eurozone economy is flat on its back and flirting with recession,” said Mr. Zandi, the Moody’s Analytics economist. “They still can avoid full-blown, outright eurozone deflation. But it’s close.”“The eurozone economy is flat on its back and flirting with recession,” said Mr. Zandi, the Moody’s Analytics economist. “They still can avoid full-blown, outright eurozone deflation. But it’s close.”