Draghi says ECB still has ammunition amid doubts | Reuters - Firstpost
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Draghi says ECB still has ammunition amid doubts | Reuters

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DAVOS, Switzerland European Central Bank President Mario Draghi said on Friday that the bank had plenty of instruments at its disposal to push meager euro zone inflation levels higher and was both determined and willing to act.

His comments at the World Economic Forum in Davos came a day after the ECB surprised markets by signaling a readiness to pursue further monetary easing at its next policy-setting meeting in March.

Sharp falls in the price of oil, slowing growth in China and steep drops in financial markets have raised new questions about the strength of Europe's economic recovery and the ECB's ability to steer inflation back up to its target of close to but just below two percent.

"We have plenty of instruments and especially we have the determination and willingness and capacity of the Governing Council to act and deploy these instruments," Draghi said.

Speaking on a later panel, Draghi's colleague on the ECB board, Benoit Coeure defended the bank's policies and communications strategy against criticism from former Bundesbank president Axel Weber, now chairman of Swiss bank UBS.

Coeure said the ECB's quantitative easing program was working, pointing to a "tremendous improvement" in the euro zone's capital markets, and what he called an 80 basis point reduction in average funding costs for companies since the launch of the scheme.

Weber, who resigned as Bundesbank president in protest at the more modest bond-buying program of Draghi's predecessor Jean-Claude Trichet, responded: "We understand that there may be no limit to what the ECB is willing to do but there's a very clear limit to what the ECB can and will achieve."

"The problem is that monetary policy has largely run its course," Weber said.

FURTHER EASING

Draghi signaled on Thursday, after the bank's governing council left interest rates unchanged, that a further easing of ECB monetary policy was likely in March, telling a news conference that the policy-making council was unanimous in its determination to act.

Asked in Davos about a financial market rout since the start of the year, he described it as "market vibrations, gyrations" and said it was premature to say that the global economic outlook had worsened as a consequence.

"There's certainly a heightened sensitivity to risk, but it's too early to say the perspective has changed. As far as we are concerned, we basically see a recovery that is continuing at modest pace, but it's a regular one."

He dismissed concerns about divergence between the U.S. Federal Reserve's December interest rate increase and the ECB's easing of monetary policy days earlier. Draghi said it reflected their different positions in the economic recovery cycle.

"It's entirely natural that monetary policies do differ and they will be on a diverging path for a while. This will be reflected in different interest rates but it's a normal process," he said.

The ECB chief said the euro zone recovery was being driven partly by cheap money and lower oil prices, which increased households' disposable income, but also by government fiscal policies that had become "broadly neutral, if not slightly expansionary".

The influx of refugees fleeing war and conflict in the Middle East and North Africa would push governments to increase public investment spending further to accommodate the migrants, he said.

He acknowledged differences among European leaders over how to share the refugee burden, but said he was "pretty confident" that an agreement would be found.

"Not to cooperate is to ignore the challenge, and to ignore it will not make it disappear," Draghi said.

Draghi also expressed confidence that Greece, which came to the brink of exit from the euro area last year, would achieve a positive first review of its third bailout program very soon.

Negotiations were under way on fiscal targets, a reform to make the Greek pension system sustainable and completing a clean-up of the financial sector, which is still dogged by non-performing loans (NPLs).

Asked about turmoil in Italian markets over NPLs in the country's own banks, Draghi said a questionnaire sent by the ECB's Single Supervisory Mechanism to Italian banks about the loans had been misunderstood.

It was not a sign that more provisions were forthcoming, he said, but rather an attempt by the SRM to get more information about national practices in dealing with NPLs.

"There was big confusion I think in my native country," the Italian ECB chief said.

(Writing by Paul Taylor; Editing by Noah Barkin)

This story has not been edited by Firstpost staff and is generated by auto-feed.

First Published On : Jan 23, 2016 00:30 IST

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