Here are four important quotes made by ECB President Mario Draghi recently

I know this is a few days late, but am going ahead with writing this post because it highlights some important comments made by European Central Bank President Mario Draghi last week.

A few days ago, European Central Bank President Mario Draghi held the customary press conference after the bank’s policy review meeting. The central bank made no change to its benchmark policy rate, but during the Q&A session, Draghi made four quotes that really stood out:

(For the full transcript of the  press conference, including Q&A, click here)

This is the first quote:

“I’d be very cautious about saying that, be very, very cautious… The recovery is there but it’s weak, it’s modest and as I said many times, it’s fragile meaning that there are several risks from financial to economic to geopolitical to political risks that could undermine easily this recovery.”

Draghi made the remarks in response to a question asked by a reporter on whether the eurozone was out of the danger zone. Clearly, unlike some politicians, the ECB doesn’t feel that complacent about the risks to the eurozone.

Good, because deflation is becoming an increasing threat to the eurozone and its fragile recovery. And there’s little doubt that the ECB will have to act soon. Draghi knows that the central bank’s work is far from over.

This is the second interesting quote:

“Against this background, the Governing Council strongly emphasises that it will maintain an accommodative stance of monetary policy for as long as necessary, which will assist the gradual economic recovery in the euro area.

” Accordingly, we firmly reiterate our forward guidance that we continue to expect the key ECB interest rates to remain at present or lower levels for an extended period of time.”

Notice the words “strongly emphasises” and “firmly reiterate”. The central bank is trying to convey, through words, that it is strongly committed to maintaining an easy-money policy for quite some time.

However, Draghi declined to specify what monetary policy tools would be used exactly, given that its benchmark policy rate is already at a record low of 0.25%. The key point to note here is that he believes the bank still has options left to ease monetary policy further.

Which brings us to the third noteworthy quote:

“….it is pointless at this stage to speculate on which instrument we would use. But let me be absolutely clear on a more general matter: we have a mandate to maintain price stability, in both directions. Thus, all instruments that are permitted by the Treaty would be eligible for use by the Governing Council. Let me make this point absolutely clear.”

Draghi is indicating that the ECB is not helpless and will use whatever monetary tools it is permitted to use to stimulate the eurozone if it threatens to fall back into recession. These stimulus measures include long-term financing for banks and negative interest rates on excess reserves of commercial banks kept with the central bank. It’s still not fully clear whether asset purchases, US Federal Reserve-style, are permissible.

Finally, Draghi also  mentioned two ‘triggers’ that would prompt the ECB to act, which leads us the fourth important quote:

“We think that there are two scenarios that would cause us to act: one is an unwarranted tightening of the short-term money markets, and the other one is a worsening of our medium-term outlook for inflation.”

 What do the comments mean?

In a nutshell, Draghi is aware (as he should be) that things are not looking good for the eurozone and is aware that deflation is a possible threat, although he doesn’t think that the continent is facing a Japanese-style deflationary era. (For more on the subject of deflation, click here.)

He also assured the world that the central bank will not hesitate to act if the situation worsens. And in central bank terms, a worsening situation is a further drop in inflation or unwarranted higher interest rates in the short-term money markets.

All in all, the ECB has come out with some reasonably strong statements that indicate unwavering support to keep monetary policy super-easy.

Now all it needs to do is follow them up with some strong action.

[Image Credit]


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