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Tags: ECB | EU | eurozone | rate | forex | money

Draghi 'Confident' European Central Bank Actions Will Boost Economy

Friday, 22 August 2014 03:14 PM EDT

European Central Bank chief Mario Draghi said Friday he is "confident" its recent policy measures will help get the eurozone economy back on its feet.

But the central bank chief insisted that eurozone governments needed to play their part and press ahead with reform measures, even if they were unpopular.

"I am confident that the package of measures we announced in June will indeed provide the intended boost to demand, and we stand ready to adjust our policy stance further," Draghi told a meeting of leading central bankers in Jackson Hole, Wyoming.

"No amount of fiscal or monetary accommodation ... can compensate for the necessary structural reforms in the euro area," Draghi insisted. "There are important reasons why national structural reforms that tackle this problem can no longer be delayed. This reform agenda spans labour markets, product markets and actions to improve the business environment."

In June, the guardian of the euro cut its key interest rates to new record lows and also unveiled a series of measures aimed at kick-starting lending to businesses in the 18 countries that share the single currency.

Even though the euro area appears to have put the worst of its long crisis behind it and is experiencing a tentative economic recovery, credit activity to small and medium-sized enterprises remains stymied, impeding a more robust upturn.

The ECB already pumped unprecedented amounts of liquidity into the banking system in 2011 and 2012 to help remedy this, but instead of lending the money on to businesses, banks tended to park the cash with the ECB instead.

In order to prevent this recurring, the central bank has introduced negative interest rates on its deposit facility, effectively charging banks for parking their funds with the ECB.

It has also drawn up a new liquidity program tailored in such a way so that the banks will lend the money on to smaller businesses.

Draghi said the ECB would begin so-called Targeted Long-Term Refinancing Operations in September, and they had "so far garnered significant interest from banks."

In addition, the ECB is working on a program to revive the market for asset-backed securities, also an important channel of small-business financing.

"Our preparation for outright purchases in asset-backed security markets is fast moving forward and we expect that it should contribute to further credit easing. Indeed, such outright purchases would meaningfully contribute to diversifying the channels for us to generate liquidity," Draghi said.

Critics complain that the relative strength of the euro is one of the factors hampering recovery because it makes eurozone exports more expensive and adds to deflationary pressures.

"Inflation has been on a downward path from around 2.5 percent in the summer of 2012 to 0.4 percent most recently," Draghi said, insisting that the ECB's decision-making governing council would use "also unconventional instruments to safeguard the firm anchoring of inflation expectations over the medium  to long term."

Nevertheless, most recently, the euro has eased somewhat against the dollar, Draghi noted.

"We have already seen exchange rate movements that should support both aggregate demand and inflation, which we expect to be sustained by the diverging expected paths of policy in the U.S. and the euro area," he said.

© AFP 2023

European Central Bank chief Mario Draghi said Friday he is "confident" its recent policy measures will help get the eurozone economy back on its feet.
ECB, EU, eurozone, rate, forex, money
Friday, 22 August 2014 03:14 PM
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