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Mario Draghi, the outgoing European Central Bank President, announced a host of stimulus measures in his penultimate policy session to boost the euro area economy as the bank slashed the growth and inflation forecasts.
Policymakers reiterated the need for a highly accommodative stance of monetary policy for a prolonged period of time, Draghi said in his introductory statement. The Governing Council was unanimous in its view that fiscal policy should become the main instrument to boost the euro area economy, he said.
There was clear majority in the Governing Council favoring the latest policy decisions, and the consensus was so broad that there was no need to take a vote, Draghi told reporters.
The decisions were taken in response to the continued shortfall of inflation with respect to the ECB's aim of 'below, but close to 2 percent'. Policymakers were concerned, particularly, about the re-anchoring of inflation expectations at a low level, Draghi said. "Incoming information since the last Governing Council meeting indicates a more protracted weakness of the euro area economy, the persistence of prominent downside risks and muted inflationary pressures," the ECB Chief said.
In its latest projections, released Thursday, the ECB staff cut the euro area inflation forecast for this year to 1.2 percent from 1.3 percent. The outlook for next year was slashed to 1 percent from 1.4 percent and the projection for 2021 was trimmed to 1.5 percent from 1.6 percent. Eurozone growth forecast for this year was cut to 1.1 percent from 1.2 percent and the projection for next year was lowered to 1.2 percent from 1.4 percent. The 2021 growth outlook was retained at 1.4 percent. Risks to the growth outlook remains tilted to the downside, the bank said. Responding to questions, Draghi said the probability of a recession in the euro area remains very small, but has risen. Rate-setters did not discuss any limit on any measures as there was headroom to go on for quite some time without such a discussion, Draghi said. The ECB does not target exchange rates, the central bank chief reiterated. Draghi is set to hand over the reins to the outgoing International Monetary Fund Managing Director Christine Lagarde on October 31. The former French finance minister is set to inherit a host of unconventional policy measures the effectiveness of which are increasingly being doubted now. "The next president will carry out a strategic review together with the Governing Council," Draghi said. The new ECB stimulus package included a 10 basis points cut to the deposit rate to -0.50 percent, significant change in the wording of forward guidance on interest rates that removed the reference to any specific time period until which the bank expects rate to remain low. However, the bank continued to signal that interest rates can be lowered further. The ECB now wants the inflation convergence, to its near 2 percent target, to consistently reflect in underlying inflation trends to start considering tightening. The bank is also set to restart its asset purchase programme, or APP, with monthly purchases of GBP 20 billion from November 1. The forward guidance on the same stated that the APP will end shortly before the bank starts raising the key interest rates. The ECB had ended its massive EUR 2.6 trillion Asset Purchase Programme, which began in 2015, in December.
The central bank also changed the terms for its new TLTRO-III loans, announced in March and will begin this month, and extended their maturity to 3 years from 2. As widely expected, the ECB also introduced a tiering system for reserve remuneration that will exempt part of banks' excess liquidity holdings from the negative deposit facility rate. "We are very concerned about the pension industry and related services," Draghi said. "Negative rates are necessary instruments of monetary policy. It has created a lot of positive effects."
Eurozone interest rates were raised last in July 2011 by 25 basis points and Draghi is set to be the only ECB chief thus far who did not raise interest rates. The Italian economist also raised several eyebrows as he was bold enough to undertake several unconventional measures at the ECB, mainly asset purchases and negative interest rates, which were inconceivable in the euro area a few years ago.
Elsewhere on Thursday, US President Donald Trump expressed his displeasure at the ECB rate cut and blamed the US Federal Reserve for not lowering rates. "European Central Bank, acting quickly, Cuts Rates 10 Basis Points. They are trying, and succeeding, in depreciating the Euro against the VERY strong Dollar, hurting U.S. exports.... And the Fed sits, and sits, and sits," Trump said on Twitter.
"They get paid to borrow money, while we are paying interest!"
