ECB’s Draghi launches new stimulus after unprecedented revolt

Frankfurt  — European Central Bank chief Mario Draghi pledged indefinite stimulus on Thursday to revive an ailing eurozone economy, after facing unprecedented resistance  from heavyweights Germany and France.

As Draghi’s eight-year mandate nears its close, the ECB cut rates deeper into negative territory and promised bond purchases with no end-date to push borrowing costs even lower, hoping to kick-start activity nearly a decade after the bloc’s debt crisis.

The bigger-than-expected stimulus will increase pressure on the US Federal Reserve and Bank of Japan to ease policy next week to support a world economy increasingly characterised by low growth and protectionist threats to free trade.

“You remember me saying that all instruments were on the table, ready to be used. Well, today we did it,” Draghi told a news conference.

Yet there were doubts, even within the ECB itself, as to whether the latest measures would be enough to stoke a eurozone recovery in the face of a US-China trade war and possible disruption from Brexit.

Draghi faced pushback from the representatives of Germany and France as well as at least one of his own board members when he pushed for resuming the ECB’s bond-buying programme, three sources said.

The heads of the Bundesbank, Jens Weidmann, and the Banque de France, Francois Villeroy de Galhau, as well ECB board member Benoit Coeure, once seen as a key Draghi ally all disapproved of the decision, the sources, who asked not to be named, said.

But they were eventually outnumbered and the issue was not put to the vote. The ECB, the Bundesbank and the Banque de France all declined to comment.

Thursday’s moves also infuriated Trump, who just this week called on the US Fed to adopt a negative-rate policy.

“They are trying, and succeeding, in depreciating the Euro against the VERY strong Dollar, hurting US exports.... And the Fed sits, and sits, and sits. They get paid to borrow money, while we are paying interest!” Trump tweeted.

A 10 basis point cut in the ECB’s deposit rate to -0.5% was fully expected but the revived bond purchases exceeded many expectations because they are set to run until “shortly before” the ECB raises interest rates.

Given that markets do not expect rates to rise for nearly a decade, such a formulation suggests that purchases could go on for years, possibly through most of Christine Lagarde’s term leading the bank.

“Today’s decisions have anchored and enshrined the Draghi legacy in future ECB decisions,” ING economist Carsten Brzeski said.

“Whatever it takes has just been extended by as long as it takes,” Brzeski said, referring to the 2012 speech in which Draghi promised to do “whatever it takes” to save the euro, a bold move credited with holding the crisis-hit bloc together.

While conservative ECB policymakers had spoken out against more bond purchases in recent weeks, the decision suggests some of them eventually agreed, giving Draghi a majority for what is probably his last major policy move.

Underlining the need for action, the ECB cut its growth projections for 2019 and 2020, predicting growth at just above 1%, below what is considered its natural potential.

The ECB’s decision triggered a rally in eurozone bonds that will cut the cost of borrowing across the 19 countries that use the euro. The single currency itself firmed a touch after wild price swings during Draghi’s news conference.

Effective?

A simple rate cut would have increased the cost to commercial banks of parking their more than €1-trillion worth of excess reserves safely at the ECB, a dangerous move since banks transmit the bulk of its policy to the real economy.

To offset that burden, the ECB promised even cheaper long-term funding and said it would introduce a multitier deposit rate to shield them from some of the charge. That could leave lenders about €2bn a year better off than previously, according to some estimates.

Yet the size and design of the scheme underwhelmed bankers whose own loans are being offered at rock-bottom rates.

“Even if the tiered interest rate introduced today provides some relief, European banks will continue to have to pay billions to the ECB every year as some sort of penalty charge tax,” Hans-Walter Peters, president of the German banking association, said.

Eurozone stocks were little changed on Thursday.

Draghi also stepped up his rhetoric in calling for governments to spend their way out of a slowdown, singling out Germany, which is obsessed with running a balanced budget.

“Now it is high time for the fiscal policy to take charge,” Draghi said. “There was unanimity, namely that fiscal policy should become the main instrument.”

With the ECB’s balance sheet already bloated and rates at record lows, analysts also questioned the effectiveness of more stimulus and suggested it could even work against the ECB.

“The key risk is that rate cuts could even backfire. Deeply negative interest rates could push up saving rates — see the surge in German savings, for instance,” Shweta Singh, a managing director at TS Lombard, said.

“Crucially, there may be much less scope this time for the euro to edge lower and thus boost inflation expectations.”

Reuters