ECB officials support Draghi’s stimulus measures
The European Central Bank embarked on a rearguard action to win over skeptical investors on Friday, a day after chief Mario Draghi unveiled a new stimulus package but blunted its impact by suggesting the ECB would not cut interest rates again.
A number of top ECB officials, both publicly and behind the scenes, spoke out in support of the measures Draghi announced on Thursday although some recognized the ECB had muddled its message to financial markets.
Shortly after announcing the package, which included cuts to all three of the ECB’s key rates and even a scheme through which it could pay banks to lend, Draghi stunned investors by appearing to rule out further rate reductions.
His remarks pushed up bond yields and sent the euro rising against the dollar, as investors took it to mean that the man they dubbed “Super Mario” after his 2012 pledge to do “whatever it takes to save the euro” was losing his touch.
A stronger euro and rising bond yields are the opposite of what the ECB is trying to achieve, which is to stimulate lending that will foster growth by making it cheaper for companies and households in the euro zone to borrow.
ECB officials watching from behind the scenes were aghast as markets struggling to understand the confusing array of announcements concluded that the ECB had run out of ammunition.
On Friday, ECB vice-president Vitor Constancio took the highly unusual step of publishing his opinion on the bank’s website. He emphasized that while there was a limit to how low interest rates could go, central banks’ ability to act in other ways should not be written off.
“Naturally, all policies have limits. In the case of the instruments we are now using, this is particularly true of negative interest rates on our deposit facility,” Constancio wrote, referring to the charge on banks for hoarding cash at the ECB.
