How Mario Draghi will be remembered as head of the ECB
The European Central Bank kept monetary stimulus unchanged in the final meeting of Mario Draghi’s presidency, an eight-year period in which he prevented a euro-zone breakup but was unable to meet his inflation goal.
The Frankfurt institution confirmed its latest package of record-low interest rates and a resumption of quantitative easing, a program unveiled last month amid unprecedented opposition from some officials. Much of the implementation will now be up to Draghi’s successor, Christine Lagarde, who attended Thursday’s Governing Council as an observer.
The president will hold his final press conference at 2:30 p.m. in Frankfurt, an opportunity to defend his legacy and repeat his warning to governments that they must urgently act to strengthen the euro zone. He has repeatedly called for fiscal stimulus and economic reforms, to little avail.
Unlike his predecessors, Draghi was never able to raise rates during his term, instead pumping ever-more liquidity into the financial system as he fought one crisis after another. He’ll be remembered for his pledge to do “whatever it takes” to save the euro during the regional debt meltdown in 2012, and he claims credit for the creation of 11 million jobs since 2013, but he’s fallen short of his primary mandate.
Inflation was 0.8 per cent in September, the lowest in almost three years. The goal is a rate just under two per cent.
Officials argue that the euro-zone economy is increasingly resilient but has been undermined by international trade tensions such as U.S. protectionism and Brexit. Global growth is cooling and investors expect the U.S. Federal Reserve to agree on a third straight rate cut next week. The central banks of Norway and Sweden kept rates on hold on Thursday -- though Sweden’s Riksbank signaled it hopes to raise its policy rate to zero by the end of the year.
Draghi’s ultra-loose strategy will likely extend well into Lagarde’s term after she starts on Nov. 1. The deposit rate is at a record-low minus 0.5%, with a pledge to cut again if needed, and won’t rise until inflation “robustly” converges with the goal. QE will start next month with asset purchases of 20 billion euros (US$22 billion) a month, and won’t end until “shortly” before the first rate hike.
Data on Thursday confirmed the outlook remains gloomy, with a purchasing managers index signaling the private sector is barely expanding and expectations the worst since 2013. Germany, the largest economy, remains in a slump. ECB officials expect a downgrade to their economic forecasts in December.
The president will be questioned in his press conference over how much ammunition the central bank really has left. Around a third of the Governing Council opposed restarting QE at the previous decision, and even longstanding supporters of stimulus are wavering. Italian Governor Ignazio Visco said he’s reluctant to take rates even deeper below zero.
Draghi’s response is likely to be that governments have let the ECB do all the heavy lifting for years and the time has come for that to change. In a speech in Milan this month, he called for better “alignment” between fiscal and monetary policy, saying that “accepting failure is not an option when there are tools available for public servants to fulfill their mandates.”
Still, the ECB’s inability to meet its inflation goal has also led to calls for a review of the entire policy framework, including whether the target should be changed. That’s a step Lagarde may choose to mark the start of her own eight-year tenure.
--With assistance from Jana Randow, Alessandro Speciale, Craig Stirling, Yuko Takeo, Fergal O'Brien, Brian Swint, Catherine Bosley, Jeannette Neumann, Lukas Strobl, Alexander Michael Pearson, Lucy Meakin, David Goodman, Zoe Schneeweiss and Iain Rogers.