Mario Draghi said the European Central Bank may bolster stimulus in March as threats to the euro-area recovery mount. The single currency slid.
“Downside risks have increased again amid heightened uncertainties about emerging-market growth prospects,” the ECB president told reporters in Frankfurt on Thursday after officials kept interest rates unchanged at record lows. “The credibility of the ECB would be harmed if we weren’t ready to revise the monetary-policy stance.”
The ECB risks seeing its inflation-boosting package of negative interest rates and at least 1.5 trillion euros ($1.6 trillion) in bond purchases thwarted by a Chinese economic slowdown that threatens to cool global growth. Emphasizing the central bank’s commitment to its ultra-loose policy settings, Draghi began his statement by reverting to forward-guidance language and declaring that interest rates will “remain at present or lower levels for an extended period of time.”
The ECB kept its deposit rate at minus 0.3 percent and the main refinancing rate at 0.05 percent. The president didn’t announce any adjustments to stimulus and said policy makers “didn’t want to discuss today the specifics of the instruments” that might be used.
The euro slid 0.6 percent to $1.0827 at 3:37 p.m. Frankfurt time. European bonds rose and stocks extended gains.
A chief concern for policy makers is that slumping oil and international financial-market turmoil is weighing on consumer prices.
Brent crude has dropped almost 40 percent since the ECB’s Dec. 3 meeting, when policy makers cut the deposit rate and extended their bond-buying program until at least March 2017. Euro-area inflation was 0.2 percent last month, still far below the central bank’s goal of just under 2 percent, and core inflation excluding energy and other volatile items was 0.9 percent. Inflation expectations as measured by 5 year, 5 year forwards are slumping.
“We have to take seriously that low commodity prices may actually have second-round effects that we definitely want to take action against,” Draghi said. “We have to be vigilant about that.”
Draghi and his predecessor, Jean-Claude Trichet, have previously used the word “vigilant” to signal upcoming policy action.
Further clues on the inflation outlook will come on Friday when the ECB is scheduled to publish its quarterly Survey of Professional Forecasters. The central bank will update its own economic projections in March and will include its first prognosis for 2018.
The ECB chief noted the impact of China’s economic rebalancing, saying it is “contributing to demand-side” weakness in oil prices.
The nation is going through “massive transitions,” International Monetary Fund Managing Director Christine Lagarde told a panel at the World Economic Forum on Thursday in Davos, Switzerland. More communication on the balance of payments and the exchange rate “would serve that transition better,” she said.
Draghi signaled the ECB is ready to expand its quantitative-easing program, including overcoming any liquidity constraints, saying that for any instrument chosen, “we want to be absolutely confident that there are no technical limits to the size of its deployment.”
He also said the return of inflation to target is more important than the impact of ultra-low rates on bank profitability, and addressed concerns that the ECB is stepping up its pressure on lenders to urgently deal with bad loans, specifically in Italy.
Non-performing loans, “were fully identified and assessed by the comprehensive assessment — there’s nothing new here,” he said. “The Single Supervisory Mechanism is is fully aware that to deal effectively with the NPLs it takes years.”