ECB’s political stability mission

Draghi, Praet head off mutineers

Mario Draghi, the European Central Bank president, has reaffirmed the ECB’s ‘make haste slowly’ policy on interest rates and asset purchases.

The aim, hidden behind the ECB’s solemn commitment to return inflation durably to near 2%, is to ensure the euro stays weak and European growth buoyant in the next six months marked by elections in France and Germany.

This should bolster the chances for solid centre-ground politicians to remain in power in the main continental economies – heading off the spectre of political instability that could otherwise damp the euro area’s growth or even rupture the single currency.

Draghi and Peter Praet, ECB board member responsible for economics, used yesterday’s annual ECB Watchers conference in Frankfurt to counter mutinous stirrings from a minority on the ECB’s 25-member council calling for speedier interest rate rises.

In particular, Draghi and Praet brushed aside speculation that the ECB could move later this year to raise its deposit rate from minus 0.4% as the first move in monetary normalisation, after more than five years of ultra-easy credit policies.

Draghi and Praet know that they face hawkish sentiment from a clutch of central bank governors, led by those from Germany and the Netherlands, and a string of gradual interest rate rises in the US. Speaking at the same conference, John Williams, president of the Federal Reserve Bank of San Francisco, said the Federal Reserve felt it was under no political pressure from the administration of President Donald Trump as it gradually normalised interest rates and adjusted its swollen balance sheet. Rising Fed interest rates signalled ‘that the economy has improved’, he said. He added that very low interest rates for a long time presented financial stability risks which the Fed had to consider.

In the account of its 9 March policy meeting, released yesterday, the ECB admitted that some members of the council voiced dissatisfaction that it was not adopting a more positive tone in communicating economic prospects. There was also pressure to change the ‘easing bias’ embodied in the council’s forward guidance on interest rates.

Draghi responded yesterday by saying: ‘Our monetary policy is working and… has been a key factor behind the resilience of the euro area economy… The recovery is progressing and may now be gaining momentum.’ But he added that ‘risks tilted to the downside’ justified continued monetary accommodation. He rejected changes in ‘the level of policy rates, the pace of asset purchases, and our forward guidance on both,’ saying they had ‘complementary effects’. The elements of ECB policy were ‘deliberately chained together… the forward guidance applied to our asset purchase programme extends also to our interest rate policy.’

Showing unusual coordination, Praet said ECB policy components were ‘wired’, ‘mutually reinforcing’ and ‘part of a package’. The ECB wished to keep alive prospects that rates could go lower as an incentive for bond markets. With their united front yesterday Draghi and Praet have underlined that they recognise the seriousness of the anti-easy money rebellion. Both men are gambling that Germany will remain relatively muted in anti-ECB criticism up to the September elections. Problems arising in the next few years, when the ECB is due eventually to change stance, may end up rebounding on Draghi’s successor, who takes over in 2019. That person is, on present calculations, likely to be none other than Jens Weidmann, the Bundesbank president.

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