European Central Bank chief Mario Draghi pledged indefinite stimulus on Thursday to revive an ailing euro zone economy, tying the hands of his successor for years to come and sparking an immediate conflict with U.S. President Donald Trump.
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 the bloc nearly a decade after its debt crisis.
The bigger-than-expected stimulus will increase pressure on the U.S. Federal Reserve and Bank of Japan to ease policy next week to support a world economy increasingly characterized 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 as to whether the ECB measures — most of the few remaining tools in its monetary policy arsenal — would be enough to boost a euro zone recovery in the face of a U.S.-China trade war and possible disruption from Brexit.
Draghi acknowledged that the ECB’s already gloomy projections did not encompass the possibility of a hard Brexit or a further escalation of the global trade war.
Thursday’s moves also infuriated Trump, who just this week called on the U.S. Fed to adopt a negative-rate policy.
“They are trying, and succeeding, in depreciating the Euro against the VERY strong Dollar, hurting U.S. 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.
Frontpage December 13, 2018