Newsmax TV & Webwww.newsmax.comFREE - In Google Play
Newsmax TV & Webwww.newsmax.comFREE - On the App Store
Tags: Draghi | Economy | ECB | Rates

Draghi Signals Economy Must Worsen for ECB to Cut Rates Again

Friday, 08 March 2013 08:07 AM EST

Mario Draghi signalled that Europe’s stuttering economy will have to get worse before he’ll consider cutting interest rates.

Even as the European Central Bank President yesterday admitted that recent economic data in the euro area has been “disappointing,” he insisted that a recovery will appear later this year. While Draghi acknowledged the Governing Council considered a rate cut, Thursday marks the third time in a row the Frankfurt-based ECB has revised its growth outlook downward without adjusting policy.

“A clear deterioration in the data going forward would be necessary to push the ECB towards action,” said Nick Kounis, head of macro research at ABN Amro in Amsterdam. “The ECB seems ready to accept an excruciatingly slow recovery and very low inflation. The central bank will continue to sit on its hands.”

The ECB helped arrest a downward spiral in the European debt crisis last year when it announced it would buy as many bonds as needed of countries that sign up to economic reforms. At the same time, lending conditions for businesses in crisis- hit nations such as Spain and Italy haven’t improved, and the turmoil unleashed by last month’s Italian election illustrates that the route out of recession could be bumpy.

Downward Revisions

Europe’s recession will be deeper than expected, according to new ECB forecasts published Thursday. The economy will contract 0.5 percent this year instead of the 0.3 percent projected three months ago, with Draghi blaming an overhang from the bigger shrinkage in the final quarter of last year. The inflation outlook for 2014 was revised down to 1.3 percent from 1.4 percent previously.

While latest data have been weak, Draghi said the ECB still anticipates a rebound in the second half of the year.

“The outlook for the short term shows weak consumption, weak investment overall, and weak domestic demand, high unemployment,” Draghi said at a press conference in Frankfurt after the ECB kept its benchmark rate at 0.75 percent. “But in the medium term, we continue seeing the beginning of a gradual recovery.”

Acknowledging a “dichotomy” between sentiment indicators based on surveys and hard data including factory orders and output statistics, Draghi said the recovery path is still “by and large, unchanged.”

A rate cut was discussed, although the “prevailing consensus” was against action at this time, he said.

Nothing Special

Draghi last used that phrase in December, when a majority of the council was open to a reduction in the cost of borrowing, only to back down over concerns that markets would take fright at the negative signal.

Draghi sought to ease concerns about Italy’s inconclusive election, saying that after some excitement, “markets have now reverted back more or less to where they were before” and “much of the fiscal adjustment Italy went through will continue going on automatic pilot.”

He also played down disruptions to what the central bank calls the “transmission mechanism,” by which its official interest rates should influence the cost of borrowing for companies and households.

Small and medium-sized companies, the backbone of most European economies, are still struggling to obtain funding. Access to bank loans deteriorated in the six months through September, according to ECB data. Firms reported a worsening in the availability of bank loans and higher rejection rates when applying for credit.

‘Wait and See’

“The large companies, by and large, had no problem in financing and funding themselves, the SMEs do,” Draghi said. “And this continues.”

Even as small business continues to face difficulty borrowing money, Draghi said the ECB is not currently planning “anything special” to ease conditions.

All in all, “Draghi depressed the hopes of those who expected lower rates in future,” said Johannes Gareis, an economist at Natixis in Frankfurt. “Instead of stepping in by action, the ECB’s strategy seems to be in wait-and-see mode.”

While damping expectations of rate cuts or more non- standard measures in the near term, Draghi also stood firm on the rules of the ECB’s yet-to-be-used bond-buying program, known as Outright Monetary Transactions.

The plan, Draghi said, remains an “effective backstop” to further financial-market turmoil as long as governments sign up to a European-sanctioned program of economic reforms. It’s not there, he added, to help countries like Ireland return to borrowing on the open market.

“The rules of the OMT are what they are,” Draghi said. “The ball is entirely with the governments. OMT cannot be used to enhance the return to the market.”

Euro Concern

Worry about the strength of the euro, which has fallen from a 14-month high against the dollar in February, also dropped out of Draghi’s introductory statement yesterday.

“The nominal and real effective exchange rates by and large continue to be along their long-term averages,” Draghi said.

The ECB’s base scenario is that the economy should start to stabilize in the first half of this year, with growth returning in the second supported by “a strengthening of global demand” and “our accommodative monetary stance,” he said.

How that accommodative policy filters through to the real economy hasn’t yet been explained by Draghi, as businesses from Spain to Italy face restrictions of credit, said Marchel Alexandrovich, senior European economist at Jefferies International Ltd in London.

“Fragmentation within the banking system remains, but that is no longer viewed perhaps as a problem the ECB can really do much about,” he said. “It was not a surprise that the ECB left policy unchanged, nor did Mario Draghi offer any obvious indication that a rate cut is imminent without a further deterioration in the macroeconomic backdrop.”

© Copyright 2023 Bloomberg News. All rights reserved.

Mario Draghi signaled that Europe s stuttering economy will have to get worse before he'll consider cutting interest rates.
Friday, 08 March 2013 08:07 AM
Newsmax Media, Inc.

Sign up for Newsmax’s Daily Newsletter

Receive breaking news and original analysis - sent right to your inbox.

(Optional for Local News)
Privacy: We never share your email address.
Join the Newsmax Community
Read and Post Comments
Please review Community Guidelines before posting a comment.
Get Newsmax Text Alerts

Newsmax, Moneynews, Newsmax Health, and Independent. American. are registered trademarks of Newsmax Media, Inc. Newsmax TV, and Newsmax World are trademarks of Newsmax Media, Inc.

© Newsmax Media, Inc.
All Rights Reserved
© Newsmax Media, Inc.
All Rights Reserved