FRANKFURT: Markets reacted strongly Tuesday to European Central Bank chief Mario Draghi’s renewed openness to lowering interest rates still further as well as other steps to boost the bloc’s anaemic growth and inflation.
“Further cuts in policy interest rates and mitigating measures to contain any side effects remain part of our tools,” Draghi told the ECB’s annual economics gathering in Sintra, Portugal.
Central bank governors had already discussed potential rate cuts at a regular meeting of the ECB’s governing council in early June, faced with an economy weighed down by trade conflicts making for sluggish price growth.
But while such talk has been in the air for some time, Draghi’s clear commitment to yet lower rates if need be, had the effect of moving markets Tuesday, bringing Germany’s DAX index of blue-chip shares back into the black – up 0.7% around 12pm in Frankfurt (1000 GMT).
Meanwhile, the euro was down 0.3% against the dollar, at US$1.12.
Draghi is set to step down from the ECB president’s chair at the end of October, having kept the euro intact through an eight-year tenure roiled by aftershocks from the financial crisis.
But the institution has fallen short of the central bank’s price stability target, of inflation just below 2%, during that time.
Price growth stood at 1.2% in May.
“In the absence of improvement, such that the sustained return of inflation to our aim is threatened, additional stimulus will be required,” Draghi said.
“We are committed, and are not resigned to having a low rate of inflation forever or even for now.”
Aside from rate cuts, other moves could include restarting “quantitative easing” purchases of government and corporate debt, which amounted to 2.6 trillion euros (US$2.9 trillion) between 2015 and 2018.
“The asset purchase programme still has considerable headroom,” Draghi said.
Over the longer term, governments will have to work more closely together and build up the eurozone’s shared institutions to keep performance on track, the Italian economist judged.
“The more integrated our economies become, the faster should be the completion of banking union and capital markets union,” Draghi said.
“And the faster the transition from a rules-based system for fiscal policies to an institution-based fiscal capacity.”
Eurozone finance ministers made only inching progress on a shared budget at a meeting on Friday, agreeing a relatively tiny volume of tightly-controlled joint spending, but failing to decide how it should be funded.
Wealthier, more fiscally conservative member states like Germany or the Netherlands are dragging their feet, fearing permanent fiscal transfers towards countries like Italy, Greece and Spain.