ECB could restart bond-buying program if needed: Draghi
Comments from central bank chief underline caution in winding down stimulus program
SINTRA, PORTUGAL— European Central Bank President Mario Draghi signalled Tuesday that the bank could delay plans announced just last week to end its giant bond-buying program, underlining policy-makers’ caution in phasing out easy money as the region’s economy slows and faces new risks.
Mr. Draghi’s comments highlight a growing policy gap between the world’s top two central banks:
The Federal Reserve last week raised short-term interest rates and signalled two more rate increases this year to stop the U.S. economy from overheating, even as the ECB signalled it wouldn’t raise rates before next September.
Speaking at the ECB’s annual economic policy conference in Sintra, Portugal, Mr. Draghi highlighted a series of threats to the region’s economy, ranging from trade conflicts to rising oil prices and financial-market volatility.
The ECB’s plans to phase out easy money are “subject to incoming data confirming the medium-term inflation outlook,” Mr. Draghi said. The bank’s 2.5 trillion euros ($2.9 trillion US) bond-buying program “can always be used in case contingencies materialize that we do not currently foresee,” he said.
The euro fell about half a cent against the dollar, to $1.1540, while eurozone government bond yields slid.
In a keenly-awaited move last week, the ECB said it expected to phase out its 30 billion euros a month bond-buying program by the end of the year, even as it holds interest rates below zero “through next summer.”
The move reflects the bank’s increasing confidence in the region’s economy, which has grown robustly over the past two years. Analysts also doubt that the ECB could extend its bond purchases for much lon- ger without violating self-imposed rules designed to stop the bank from financing governments or overly distorting market prices.
However, recent data suggest the Eurozone’s growth rate has slowed sharply this year.
That may partly be due to temporary factors such as cold winter weather, Mr. Draghi said Tuesday. But he warned that firms are also facing bottlenecks, and pointed to increasing economic threats, from trade conflicts to volatile finan- cial markets. He stressed that the ECB’s key interest rates — currently minus 0.4 per cent — wouldn’t rise at least through the summer of 2019, and perhaps beyond that.
“What is undeniable is that uncertainty surrounding the growth outlook has recently increased,” Mr. Draghi said.
Global stock markets have slumped in recent days amid mounting trade tensions between the U.S. and China, which could disproportionately hit the 19-nation eurozone be- cause of its heavy focus on exports.
Germany’s central bank on Friday slashed its growth forecast for the largest eurozone economy this year and said concerns over protectionism and “greater political uncertainty in some euro area countries” had clouded the outlook. The Bundesbank now expects growth of 2 per cent this year, down from a forecast of 2.5 per cent in December.
While investors are cautiously eyeing the actions of Italy’s populist government, Germany is also facing its own political turbulence. Chancellor Angela Merkel is facing a rebellion from a junior coalition partner over migration that could bring down her government.
The European Union is also preparing for a major summit later this month where leaders will discuss the future architecture of the eurozone.
In the face of those risks, Mr. Draghi stressed that the world’s number two central bank will remain “patient, persistent and prudent.”
“Our decisions also reflected the desire of the Governing Council to retain the ability to react to potential future shocks,” he said.
After years of easy-money policies, some analysts and officials worry that major central banks have little ammunition left to deal with any fresh economic downturn.
Speaking in Sintra on Monday evening, former U.S. Treasury Secretary Lawrence Summers said central banks had traditionally fought recessions by cutting interest rates by around 5 percentage points. Yet both the ECB and the Federal Reserve are likely to have “nowhere near” enough space to do that for many years, Mr. Summers said.
“The world can ill afford an economic downturn,” Mr. Summers said.