Mario Draghi has an admirable record of getting the markets to do what he wants. His promise to do whatever it takes to preserve the euro in the midst of the Greek crisis helped to reverse sentiment on the fate of the euro.
Today's strong hint at further monetary stimulus, however, failed to impress the currency markets for more than a few hours.
The European Central Bank president said in the news conference following the bank decision to keep rates on hold, that the governors will assess their programs at the next policy meeting in March
In an echo of his famous statement in 2012, Mr. Draghi said there are “no limits” to the measures they are willing to use achieve their goals on inflation and growth.
“We are adapting our instruments to the changing conditions,” Mr. Draghi commented. “The credibility of the ECB would be harmed if we weren’t ready to revise the monetary-policy stance.”
The euro dropped sharply on the news, falling 1.4 percent to 1.0777 in the 30 minutes following Mr. Draghi’s statement. But once the surprise had worn off, the united currency began a slow climb back. By the close in New York it was at 1.0875, less than 20 points below where it was before Mr. Draghi’s press conference.
More than a year after the ECB announced its own limited quantitative-easing plan despite resistance from the German Bundesbank, and a month after extending that program and taking the deposit rate deeper into the negative, the bank’s goals are largely unmet. European inflation is less than half the 2 percent target and economic growthacross the monetary union is moribund.
With internal and external risks to Europe on the rise, from a devaluing Chinese Yuan and a cooling mainland economy exporting deflation, to the crash of oil and commodity prices, faltering world trade, and an immigration crisis that is exposing deep political fault lines across the continent, Mr. Draghi’s insistence that monetary policy has an answer is far less impressive than it was in 2012 when it was the antidote to a purely European crisis.
Mr. Draghi underlined the bank’s commitment to an ultra-loose monetary policy for the foreseeable future, keeping its deposit rate at -0.3 percent and the main refinancing rate at 0.05 percent. He began his prepared statement by declaring that interest rates will “remain at present or lower levels for an extended period of time.”
The problem for Mr. Draghi and the ECB, as it is for Janet Yellen and the Federal Reserve and Haruhiko Kuroda of the Bank of Japan is that after almost a decade the emergency treatment of zero rates is no longer effective.
The world's economic problems have left the central bankers behind.
Chief Market Strategist
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