Bloomberg News

Incoming ECB President Draghi Sees ‘Significant’ Economic Risks

October 26, 2011

Oct. 26 (Bloomberg) -- Incoming European Central Bank President Mario Draghi said there are “significant” downside risks to the economic outlook in the 17-nation euro area.

“The risks of a weakening of growth prospects are significant, in the context of strong uncertainty,” Draghi said in a speech in Rome today, citing slowing world demand, a drop in consumer and business confidence and the region’s sovereign debt crisis.

Draghi, who succeeds Jean-Claude Trichet at the helm of the ECB on Nov. 1, may come under pressure to cut interest rates as the debt crisis threatens euro-area banks and damps economic growth. He indicated the ECB will continue to buy government bonds and provide banks with unlimited liquidity as long as is necessary to ease market tensions, while reiterating the measures are “temporary by nature.”

Draghi, who heads Italy’s central bank, urged governments to reach agreement on the revamped bailout fund for Europe and implement it immediately. “Without a definitive and lasting answer from national” governments “to boost growth and fix public finances,” the debt crisis won’t be solved, he said.

The ECB will be forced to lower its benchmark interest rate, which it increased twice this year, by a quarter percentage point to 1.25 percent in December, according to the median forecast in a Bloomberg News survey of 34 economists conducted last month.

The ECB probably made a mistake by tightening policy in a worsening financial crisis to fight price pressures, Richard Hoey, chief economist at Bank of New York Mellon Corp., said in Amsterdam yesterday. He said the central bank may start cutting borrowing costs at its next policy meeting on Nov. 3, the first to be chaired by Draghi.

--Editors: Matthew Brockett, Leon Mangasarian

To contact the reporter on this story: Chiara Vasarri in Brussels at cvasarri@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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