Draghi ties Lagarde’s hands with promise of indefinite stimulus

FRANKFURT: European Central Bank chief Mario Draghi pledged indefinite stimulus to revive an ailing euro zone economy, tying the hands of his successor for years to come and sparking an immediate conflict with US 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 activity nearly a decade after the bloc’s debt crisis.
The bigger-than-expected stimulus will increase pressure on the US Federal Reserve and Bank of Japan to ease policy next week to support a world economy increasingly characterised 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, even within the ECB itself, as to whether the latest measures — most of the few remaining tools in its monetary policy arsenal — would be enough to stoke a euro zone recovery in the face of a US-China trade war and possible disruption from Brexit.
Draghi faced faced pushback from the representatives of Germany and France as well as at least one of his own board members when he pushed for resuming the ECB’s bond-buying programme, three sources told Reuters.
Thursday’s moves also infuriated Trump, who just this week called on the US Fed to adopt a negative-rate policy.
“They are trying, and succeeding, in depreciating the Euro against the VERY strong Dollar, hurting US 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 per cent 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.
While conservative ECB policymakers had spoken out against more bond purchases in recent weeks, the decision suggests some of them eventually agreed, giving Draghi a majority for what is probably his last major policy move.
Underlining the need for action, the ECB cut its growth projections for this year and next, predicting growth at just above 1 per cent, below what is considered its natural potential.
The ECB’s decision triggered a rally in euro zone bonds that will cut the cost of borrowing across the 19 countries that use the euro. The single currency itself firmed a touch after wild price swings during Draghi’s news conference.
A simple rate cut would have increased the cost to commercial banks of parking their more than 1 trillion euros worth of excess reserves safely at the ECB, a dangerous move since banks transmit the bulk of its policy to the real economy. — Reuters