logo
Plus   Neg
Share
Email

ECB's Draghi Signals Further Rate Cuts Stoking Trump's Ire

draghi-ecb-061819-lt.jpg

European Central Bank President Mario Draghi said on Tuesday that the central bank still has room to cut interest rates and measures to cushion the side effect from low interest rates, triggering accusation from the US President Donald Trump that such comments were unfair to his country.

Speaking at the ECB Forum on Central Banking in Sintra, Portugal, Draghi said, "Further cuts in policy interest rates and mitigating measures to contain any side effects remain part of our tools."

"And the APP [asset purchase programme] still has considerable headroom."

The ECB ended its massive EUR 2.6 trillion Asset Purchase Programme, which began in 2015, in December.

Later on Tuesday, Trump accused Europe of currency manipulation saying Draghi's comments, which led European market higher, were unfair to the US.

"Mario Draghi just announced more stimulus could come, which immediately dropped the Euro against the Dollar, making it unfairly easier for them to compete against the USA," Trump said in a tweet.

"They have been getting away with this for years, along with China and others."

Risks to the euro area economic outlook remained tilted to the downside and indicators for the coming quarters suggest lingering softness, Draghi said.

"The prolongation of risks has weighed on exports and in particular on manufacturing," the ECB Chief said.

"In the absence of improvement, such that the sustained return of inflation to our aim is threatened, additional stimulus will be required."

The main refi rate is currently at a record low zero percent and the deposit rate at -0.40 percent. The marginal lending facility rate is at 0.25 percent.

The ECB targets inflation "below, but close to 2 percent."

Official data confirmed on Tuesday that euro area inflation slowed sharply to 1.2 percent in May, its lowest level in over a year, and core price growth eased below 1 percent to 0.8 percent.

Draghi asserted that the ECB is not resigned to having a low rate of inflation forever or even for now.

"We remain able to enhance our forward guidance by adjusting its bias and its conditionality to account for variations in the adjustment path of inflation," the ECB chief said. "This applies to all instruments of our monetary policy stance."

Benoit Coeure, a member of the ECB Executive Board, said in an interview published on Monday that the bank would consider the impact of negative interest rates and the tiering system if it had to cut rates in future.

"If the conclusion were that cutting rates is the best option, then we would have to consider the impact of negative rates on financial intermediation, especially for banks," the policymaker to the Financial Times.

"We would have to consider whether a tiering system is needed," he said.

Currently, the prevailing view in the ECB's rate-setting body, the Governing Council, is that the tiering system is not needed, Coeure said, adding that "we also agree that it deserves further reflection."

A tiered deposit rate can partly reduce the burden of the cost banks pay on the cash they park at the ECB.

While leaving the interest rates unchanged on June 6, the ECB extended its forward guidance to reflect its view that rates will remain at the present level at least through the first half of 2020.

Eurozone interest rates were raised last in July 2011 by 25 basis points.

However, markets have started pricing in a rate cut from the ECB before the end of this year.

"Question is no longer what has to happen for ECB to cut rates this summer but rather what would have to happen for ECB not to cut," ING economist Carsten Brzeski said in a tweet.

For comments and feedback contact: editorial@rttnews.com

Economic News

What parts of the world are seeing the best (and worst) economic performances lately? Click here to check out our Econ Scorecard and find out! See up-to-the-moment rankings for the best and worst performers in GDP, unemployment rate, inflation and much more.

Follow RTT
>