Mario Draghi leaves ECB still backing his monetary policy legacy

Frankfurt — European Central Bank (ECB) president Mario Draghi defended his monetary policy stance on Thursday as his eight-year tenure at the bank closes in exactly the same place he started: trying to prop up a perpetually ailing currency bloc.

With growth barely holding in positive territory and the outlook darkening, it was hardly the grand finale hoped for by Draghi, whose 2012 promise to do “whatever it takes” to save the euro — code for rescuing heavily indebted countries — is credited with saving the shared currency from collapse.

With inflation languishing at less than half the ECB's target and little hope for a speedy rebound, Draghi even kept the door open to more stimulus, days before he hands the reins to new ECB chief Christine Lagarde.

Despite weak growth across the eurozone, Draghi insisted the benefits of loose money policy far outweighed the risks and rejected the suggestion that a public split with policy hawks in the bank had tainted his legacy.

“I feel like someone who tried to comply with the mandate in the best possible way,” Draghi, whose term passed without a single interest-rate hike, told a news conference.

“These disagreements are often made public and often they are not, so ... I have taken this as part and parcel of the ongoing debate and discussions.”

While acknowledging that the bank was keeping a close watch for any unintended consequences of ultra-low and negative interest rates, he added that they had clearly stimulated the economy through higher lending and helped boost employment.

“For us it has been a very positive experience,” he said.

Asked what advice he had for former International Monetary Fund chief Lagarde, who attended but did not participate in Thursday's meeting, he replied: “No advice needed”.

Hawks circle

The spat with rebels on the ECB governing council has taken the shine off an otherwise remarkable reign in which Draghi led the ECB in an unprecedented experiment with unconventional monetary policy that helped avert deflation and stopped a debt crisis from spiralling out of control.

Much of Thursday's focus was on his decision to push through the open-ended bond-buying scheme that will tie his successor's hands for years to come, despite opposition from a third of policymakers.

At Thursday's meeting, the ECB kept its benchmark deposit rate unchanged at minus 0.5%. It also reaffirmed that its open bond purchases would start in November, at a rate of €20bn per month and will run “as long as necessary”.

Expecting no change, financial markets were calm after the decision, with the euro little changed against the dollar at 1.1123 and German 10-year yields at -0.382%.

Turmoil within the ECB is likely to persist and Lagarde will have to deal with objections that Draghi's policy of sub-zero deposit rates and huge bond purchases are hurting savers, squeezing banks and pension funds and inflating financial bubbles, while doing little for inflation.

And it's not just a few prominent hawks — including the central bank governors of Germany, the Netherlands and Austria — who question the wisdom of resuming the bond-buying programme.

France's representatives on the governing council also joined the chorus and 95% of respondents in a Reuters poll said the stimulus package would not significantly help in bringing inflation back to the ECB's target of just under 2%.

Lagard review

Draghi played down the dissent, pointing out that all moves made in September were backed by majorities and were once again confirmed by the outcome of October's meeting. But the split has left an imprint on ECB-watchers.

“Dissent within the governing council against the latest package cannot be ignored, especially since it is no longer coming exclusively from the same core countries,” Gilles Moec, chief economist of French insurer Axa Group, said.

Seeking to buy time, Lagarde has promised a review of the bank's “monetary framework”, likely to mean its policy goals and tools, similar to a review now being conducted by the US. Federal Reserve.

The problem for the ECB is that some of the major factors depressing prices are outside its control.

These range from demographic and technological changes to the eurozone's reliance on exports, in particular by German manufacturers, which leaves it bearing the brunt of a global trade war.

With the ECB's firepower now largely spent, Draghi and his successor are likely to continue urging governments that are running a surplus, such as Germany and the Netherlands, to invest more to generate economic growth at home.

But latest budget figures, showing only a modest expansion, suggest their calls are likely to be frustrated for now.

“We think ECB monetary policy will be on autopilot for a while,” BNP Paribas said. “We think it will maintain its current hyper-accommodative stance well beyond 2020 and that the threshold for further easing is rather high.” 

Reuters