European Central Bank (ECB) President Mario Draghi defended the tools that the institution has available on Tuesday, saying that it could cut interest rates again or provide further asset purchases if inflation doesn’t reach its target.
Speaking at the ECB Forum in Sintra, Portugal, Draghi gave a defiantly dovish tone, saying that if the economic situation deteriorates in the coming months the bank would announce further stimulus. The euro dropped 0.2% against the dollar in a matter of minutes as Draghi delivered the remarks. The German 10-year bund yield hit -0.30% for the first time ever and the U.S. 10-year Treasury yield hit its lowest since September 2017 at 2.0475%.
“In the absence of improvement, such that the sustained return of inflation to our aim is threatened, additional stimulus will be required,” Draghi stated.
The ECB foresees “lingering softness” in the short term, in particular due to geopolitical factors and trade conflicts, which have weighed on exports and on the manufacturing sector — two important drivers of economic growth in the euro zone.
Earlier this month, the ECB revised its interest rate expectations, adding that its first-post crisis rate hike is unlikely to come before mid-2020. This dovish stance shows the central bank is doubtful about economic recovery in the 19-member region.
The ECB also presented new economic forecasts earlier this month, with lower growth and inflation projections for 2020, but marginally higher for this year.
During his speech in Sintra, Draghi also tried to reassure market players about the bank’s ability to act amid growing doubts on the real effect of monetary policy if a new recession were to materialize.
“The (European) Treaty requires that our actions are both necessary and proportionate to fulfil our mandate and achieve our objective, which implies that the limits we establish on our tools are specific to the contingencies we face. If the crisis has shown anything, it is that we will use all the flexibility within our mandate to fulfil our mandate — and we will do so again to answer any challenges to price stability in the future,” Draghi told the audience.
At the same conference, which began Monday, different policymakers and ECB-watchers raised concerns about the bank’s toolkit. “I am nearly sure that the ECB cannot by itself, at this point, fight a recession … It will need help, it is fairly obvious,” Olivier Blanchard, former chief economist at the International Monetary Fund told CNBC’s Annette Weisbach in Sintra.
He explained that the question is not so much the lack of available tools, but more their actual impact on the economy.
Nonetheless, Draghi stated Tuesday the different options that the ECB has available:
“We remain able to enhance our forward guidance by adjusting its bias and its conditionality to account for variations in the adjustment path of inflation. This applies to all instruments of our monetary policy stance,” he said.
“Further cuts in policy interest rates and mitigating measures to contain any side effects remain part of our tools. And the APP (asset purchase program) still has considerable headroom,” he added.
On the back of the sovereign debt crisis of 2011, the ECB announced a series of measures to boost inflation and ensure price stability — its core aim. These included rate cuts, purchases of corporate and government bonds, and cheaper loans to banks. In the second half of 2018, the ECB decided to lift some of this stimulus amid a recovery in the region. However, the recent dovish approach by the central bank suggests that it is too early to remove all the support to the economy and, more importantly, that further interventions are likely to be required.
ECB Governing Council Member Ewald Nowotny told CNBC there’s also a fundamental role to be played by fiscal policy from national governments.
“What Draghi showed was indeed there is a quite variety of instruments that are still available,” he told CNBC’s Annette Weisbach. But “I think what’s also important is the role of fiscal policy. It has to be taken into more perspectives and it has to be strengthened,” he said.
There has long been criticism of euro zone governments for not doing enough to improve their countries’ fiscal position, relying solely on the ECB and on monetary policy to boost the region’s economy.
Draghi has often made that point. “All countries should reinforce their efforts to achieve a more growth-friendly composition of public finances. Likewise, the transparent and consistent implementation of the European Union’s fiscal and economic governance framework over time and across countries remains essential to bolster the resilience of the euro area economy,” Draghi said in April last year.