BCN-17,18 ECB’s Draghi vows support for eurozone in ‘world far from normal’

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ECB’s Draghi vows support for eurozone in ‘world far from normal’

VILNIUS, June 7, 2019 (BSS/AFP) – European Central Bank chief Mario Draghi
on Thursday detailed prolonged support to the eurozone economy, saying the
Frankfurt institution must keep shoring up financial conditions in a world
“far away from being normal”.

Explaining a six-month extension of historic low rates, the Italian
economist said “we are far away from normalisation because the rest of the
world, and the rest of the challenges, are far away from being normal.”

For now, “the rising threat of protectionism, the geopolitical factors
that are weighing on the eurozone economic outlook, would rule out any
increase in interest rates,” he added.

The ECB’s main refinancing rate remains at zero, while financial firms
must pay a negative interest rate of 0.4 percent on deposits with the central
bank.

On top of the lower-for-longer move, Draghi said the ECB would offer
highly favourable conditions to banks in a third round of cheap loans known
as TLTROs.

If lenders pass on enough credit to the wider economy, the ECB could offer
interest as low as -0.3 percent — in effect paying them to borrow money.

“The ECB has bought itself enough space to react to negative risks in the
future,” commented economist Marcel Fratzscher of the Berlin-based DIW think-
tank.

But the central bank enjoys “little support from politics, which should
support the economy with an active fiscal and structural policy and move
forward on important European reforms,” Fratzscher added.

– Lower forecasts –

Draghi laid out the latest set of ECB quarterly economic forecasts, which
called for growth of 1.2 percent and inflation at 1.3 percent this year —
slightly higher than in its March predictions for the 19-nation eurozone.

The central bank slashed its growth outlook for 2020 by 0.2 points, to 1.4
percent, as well as reducing the inflation forecast for next year to the same
pace.

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“Core” inflation, which excludes volatile items like food and energy, is
weaker still.

Such figures mean the ECB’s years of interventions have made only inching
progress towards its inflation goal of just below 2.0 percent.

It has held rates at rock-bottom and completed a “quantitative easing”
(QE) bond-buying scheme amounting to 2.6 trillion euros ($2.9 trillion)
between 2015 and 2018.

Both were designed to increase lending, economic growth and ultimately
inflation.

But while jobs and wages — key contributors to inflation — have
expanded, price growth has not followed in step as policymakers hoped.

Observers have pointed to trade disputes between Washington and key
partners like China, Mexico and Europe as one reason for sluggish GDP growth
and inflation.

Other risks weigh on the eurozone, including a budget confrontation
between Brussels and Rome, Greek elections and a possible no-deal Brexit
following the departure of British Prime Minister Theresa May.

With hoped-for solutions to some of the knotty issues failing to
materialise in recent weeks and months, “uncertainty about global trade
growth has extended beyond what we believed in March,” Draghi said.

He stressed the ECB’s “readiness to act in case of adverse contingencies”
with its suite of monetary policy tools, including restarting bond-buying.

“The policy space is there,” Draghi said, although “we have not discussed
which contingency would call for which instrument”.

– ‘More stimulus required’ –

“With the economy likely to remain weak and inflation well below the ECB’s
near-two percent target, we think much more policy stimulus will be required,
culminating in more QE during 2020,” commented Andrew Kenningham of Capital
Economics.

Analysts have in recent weeks pointed to so-called “five-year/five-year”
swaps — which reflect how financial players judge the pace of price growth
between five and 10 years from now — close to their lowest ebb under
Draghi’s eight-year tenure.

“The biggest risk for the ECB are the only weakly anchored inflation
expectations,” DIW’s Fratzscher said.

“We are not at all accepting the current inflation rates or what the
current expectations of inflation are,” Draghi said.

But price stability in the single currency area will not be his
responsibility for much longer.

A changing of the guard is under way at the ECB, with a new chief
economist already appointed and Draghi set to depart on October 31.

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