Draghi downer for EU growth
EUROPEAN Central Bank chief Mario Draghi was last night accused of ‘over-promising and under-delivering’ after his plans to kick- start the flagging eurozone economy fell flat.
The Frankfurt- based central bank, one of the most powerful institutions on the Continent, cut a key interest rate deeper into negative territory and extended its money-printing programme.
But the moves were not as aggressive as expected, fuelling fears that the eurozone faces a prolonged period of sluggish growth and worryingly low inflation or deflation.
Europe is Britain’s biggest export market and the malaise on the Continent poses a threat to the recovery in the UK.
One analyst accused Draghi – who is known as Super Mario – of promising Christmas gifts but turning up with coal. Another, Patrick O’Donnell, a fund manager at Aberdeen Asset Management, said: ‘Draghi has over-promised and under-delivered.
‘Everyone was expecting Draghi to be the white knight for Europe once again and he hasn’t really showed up. [The] measures amount to tinkering around the edges.’
The ECB cut its deposit rate from minus 0.2pc to minus 0.3pc – effectively increasing the amount European lenders are charged to park cash with the central bank. Negative interest rates are designed to persuade banks to lend to households and businesses rather than keep money with the central bank.
The ECB also said its quantitative easing programme – through which it is pumping €60bn (£43bn) of newly created cash into the economy every month – would be extended beyond September 2016 to ‘the end of March 2017 or beyond if necessary’.
But the rate cut was not as deep as expected and the decision to merely extend QE, rather than increase the size of the monthly dose of emergency aid, took disappointed investors by surprise.
Wouter Sturkenboom, of Russell investments, said: ‘Super Mario Draghi has a reputation for exceeding the market’s expectations but his reputation got a serious knock.’
The euro, which had fallen in recent weeks on expectations that Draghi would unleash a huge stimulus programme, and in doing so weaken the currency, soared against the pound and the dollar.
The currency jumped by 3pc against the greenback to $1.0941 and by 2pc against sterling to 72.42p. Stock markets across Europe plunged into the red, with the FTSE 100 down more than 2pc in London and the Dax and Cac off more than 3pc in Frankfurt and Paris.
Analysts warned that the rise in the euro posed a threat to the eurozone economy by pushing up the price of exports for foreign buyers.
Ben Brettell, senior economist at Hargreaves Lansdown, said: ‘The disappointment in financial markets is palpable ... The road to recovery in Europe remains long, bumpy and sharply uphill.’
Craig Erlam, senior analyst at currency firm Oanda, said: ‘Mario Draghi and the ECB have spent weeks building up expectations only to under-deliver on an enor- mous scale. The market was led to believe it would get a substantial holiday treat and ended up with an exquisitely wrapped lump of coal.’
Growth across the eurozone remains weak and unemployment is stubbornly high at over 10pc, while inflation is just 0.1pc.
Draghi had insisted in recent weeks that the ECB was ready to act, forcing him to defend his actions yesterday. The italian said: ‘i don’t think our communication was wrong. i think these measures need time to be fully appreciated and we’ll see.’
But Simon Ward, chief economist at Henderson Global investors, said the ECB ‘badly mishandled its communication strategy’ in the run-up to the announcement, adding: ‘The suspicion is that Draghi overplayed his hand and ran into stiff German-led opposition.’