Bloomberg News

Draghi Says Rates Accommodative as Economic Outlook Worsens

May 03, 2012

European Central Bank President Mario Draghi said, “Risks to the outlook for inflation rates in the coming years are still to be seen as broadly balanced.” Photographer: Angel Navarette/Bloomberg

European Central Bank President Mario Draghi said, “Risks to the outlook for inflation rates in the coming years are still to be seen as broadly balanced.” Photographer: Angel Navarette/Bloomberg

European Central Bank President Mario Draghi said interest rates remain supportive and policy makers still expect a gradual economic recovery this year even as recent data cloud the outlook.

Latest indicators “are not enough to change our baseline scenario, which foresees a gradual recovery in the course of the year,” Draghi said at a press conference in Barcelona today after the ECB held its benchmark interest rate at a record low of 1 percent. “We didn’t discuss any specific move in interest rates but we did discuss our general monetary policy stance, which we found accommodative in view of an economic outlook that becomes more uncertain.”

Austerity measures aimed at stemming the debt crisis have pushed euro-area economies from the Netherlands to Spain back into recession. While the ECB is reluctant to add to stimulus as it presses governments to enact reforms, Draghi left open the possibility of further action when policy makers have updated economic projections in June.

“By highlighting prevailing major economic uncertainties, acknowledging that the risks to the euro-zone growth outlook are slanted to the downside and indicating that risks to the inflation outlook are now broadly balanced, the ECB does appear to be leaving the door open to an eventual further interest-rate cut,” said Howard Archer, chief European economist at IHS Global Insight in London.

Rate-Cut Bets

The euro rose after Draghi said policy makers didn’t discuss a rate reduction today, climbing as high as $1.3180 from $1.3117 before his press conference started. Investors had increased bets on rate cuts after Draghi last week indicated the ECB was reassessing the growth and inflation outlook.

“We saw stabilizing economic activity at low levels in the first three months” of the year, Draghi said today. “The most recent survey indicators show uncertainty prevailing. We will be clearer in our assessment next month.”

After rising in January and February, a gauge of euro-area manufacturing plunged in April to the lowest in almost three years, according to London-based Markit Economics. The index, based on a poll of purchasing managers, shows that manufacturing activity has contracted for nine straight months.

A report yesterday showed euro-area unemployment rose to a 15-year high of 10.9 percent in March, and an economic confidence indicator published by the European Commission fell last month to the lowest level since December.

Economic Projections

In March, the ECB revised down its 2012 outlook for the 17- nation euro economy to a contraction of 0.1 percent from an expansion of 0.3 percent. The central bank also raised its 2012 inflation forecast to 2.4 percent from 2 percent.

Inflation will remain above the ECB’s 2 percent limit this year before slowing in 2013, Draghi said. He dropped last month’s reference to short-term “upside risks” to inflation, saying they are now “broadly balanced.” The economic outlook remains subject to downside risks, Draghi said.

The ECB, which has pumped more than 1 trillion euros ($1.3 trillion) into the financial system in an effort to avert a credit crunch, wants governments to press ahead with fiscal tightening to restore investor confidence.

“Addressing divergences among individual euro-area countries is the task of national governments,” Draghi said. “As concerns the monetary policy stance of the ECB, it has to be focused on the euro area. Our primary objective remains to maintain price stability over the medium term.”

Spanish Yields

Investor concern over Spain’s ability to reduce its budget shortfall has increased since Prime Minister Mariano Rajoy announced in March that the country will miss a 2012 deficit goal set by the European Union. That pushed Spanish 10-year yields above 6 percent last month and propelled the cost of insuring the country’s bonds against default to a record.

Draghi said the ECB has “full confidence” that Spain will undertake actions to shore up its banking system and reduce the deficit. “The track record is good,” he said. “We have no doubt whatsoever that the action will be taken and will be as speedy and transparent as in other countries.”

In Italy, Draghi said “remarkable progress has been achieved,” and the government “should be encouraged in its efforts.”

He indicated the central bank’s emergency lending measures will remain in place for the time being.

“Any exit strategy remains premature,” Draghi said, adding that the ECB will make an announcement in June about its policy of lending banks as much money as they need in refinancing operations.

The ECB said in October the full-allotment policy would be kept in place at least until around the end of the second quarter of this year.

To contact the reporter on this story: Jeff Black in Frankfurt at jblack25@bloomberg.net

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


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