Last updated: August 7, 2014 8:22 pm
Mario Draghi says eurozone recovery is on track
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ECB president Mario Draghi
European Central Bank president Mario Draghi has insisted that the eurozone’s recovery remains on track, despite acknowledging threats to growth had “heightened” because of crises in Ukraine and the Middle East.
The ECB kept rates on hold for a second consecutive month and offered no hint that it had moved closer to embarking on broad-based asset purchases, known as quantitative easing.
Mr Draghi acknowledged that eurozone momentum had weakened in the second quarter and a rise in political tensions would inflict more damage. But he maintained that a weak recovery would continue and longer-term inflation expectations remained anchored to the central bank’s target of below but near 2 per cent.
The ECB president urged governments to boost the recovery, blaming a lack of labour market reform and excessive business regulations in Italy for the eurozone’s third-biggest economy returning to recession. Mr Draghi also countered calls from François Hollande, France’s president, for more central bank action, saying it would do little unless Paris tackled structural economic flaws.
Gilles Moec, of Deutsche Bank, said Mr Draghi’s remarks suggested that “governments should focus on their own shortcomings rather than asking the ECB for more.”
Mr Draghi said monetary policy would provide more support in the months ahead as measures announced in June took full effect.
The central bank will next month hold the first of six targeted longer-term refinancing operations, which require banks to sign up to commitments on lending and are widely seen as the most important strand of the June package.
Market estimates of a “sizeable” take-up of the offer of cheap, fixed-rate, four-year loans, of between €450bn and €850bn of a possible €1tn, were confirmed by the ECB president.
The euro, which has fallen more than 2 per cent against the dollar since the start of June to $1.335, was likely to depreciate further, supporting eurozone companies by lowering the price of their products against competitors outside the currency area.
“Markets have perceived that . . . monetary policies in the euro [area] and the United States are, and are going to stay, on a diverging path,” Mr Draghi said. “The fundamentals for a weaker exchange rate are much better than they were two or three months ago.”
The US central bank is expected to stop buying US Treasuries in the autumn and to raise rates towards the middle of next year.
Europeans are braced for a new age of austerity as governments across the region take action to eliminate unsustainable budget deficits.
The ECB on Thursday kept its main refinancing rate at 0.15 per cent and its deposit rate in negative territory, continuing to charge 0.1 per cent on a portion of banks’ reserves parked at the ECB.The council reiterated that rates would remain at their current record low levels for an “extended period”. Economists do not expect the central bank to raise borrowing costs at least until the end of 2016.
The ECB will shortly hire a consultant to design a programme for possible purchases of asset-backed securities, a move the central bank hopes will aid lending across the bloc by reviving the dormant securitisation market.
Inflation fell to a fresh four and a half year low of 0.4 per cent in July, less than a quarter of the ECB’s target. Eurozone gross domestic product figures, due out next week, are expected to show growth was as weak in the three months to June as in the opening quarter.
The central bank president said the collapse of Portuguese lender Banco Espirito Santos was unlikely to require taxpayer funds or inflict significant damage on the health of the eurozone area’s financial system.
Additional reporting by Stephen Smith.
Copyright The Financial Times Limited 2014.
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