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Mario Draghi Blusters As the ECB Sits on Its Hands

Habsburg-era bling substituted for action at the ECB's meeting in Vienna this month.Habsburg-era bling substituted for action at the ECB's meeting in Vienna this month.
Habsburg-era bling substituted for action at the ECB's meeting in Vienna this month.European Central Bank

The European Central Bank sat on its hands, as expected, at its latest policy meeting Thursday, despite the prospect of another two years of sub-target inflation and tepid growth.

At his regular post-meeting press conference, President Mario Draghi said that the bank was content to wait for its most recent stimulus measures (it cut interest rates and broadened its quantitative easing program back in March) to have their full effect.

The ECB’s inaction had been expected after a stronger-than-expected first quarter for the Eurozone, when the economy grew 0.7%. But the bank’s latest forecasts, which take into account the March actions, still project it won’t meet its target of just under 2% annual inflation even by 2018, seeing it instead at 1.6%. They also expect a rate of growth which will barely allow weaker Eurozone members to grow their way out of their debt problems.

“This means that there currently is a high chance that the ECB will eventually have to top up its monetary measures, rather than starting tapering early,” said Carsten Brzeski, chief economist for Germany and Austria with ING-Diba in Frankfurt.

Draghi repeated that the ECB could return with more stimulus at a later date, if shocks from the world economy or the U.K.’s referendum on EU membership June 23rd warranted. That’s despite strong German opposition and a very strongly-worded warning yesterday from the Organization for Economic Cooperation and Development that ultra-low interest rates now have more risks than benefits for the global economy. (The OECD and ECB agree that governments should be doing more to stimulate the economy with investments to raise productivity.)

Since March, the ECB has been buying 80 billion euros ($89 billion) in bonds every month to push cash into the Eurozone economy and keep market interest rates low. The return has been a meager increase in lending to businesses (up an adjusted 1.2% year-on-year in April), while lending to households has plodded along at a staid 1.5% annual rate. Draghi was at pains to point out that those figures would have been much worse if the ECB had done nothing back in March. As of next week, it will start buying corporate bonds, a measure that could benefit large U.S. companies that issue debt in euros.

“Monetary policy measures…have clearly improved credit conditions for companies and households,” he argued.

In a generally low-key press conference, the only other item of note was the ECB’s refusal to cut Greece any more slack until the Eurozone has verified that it’s actually implementing the reforms it pushed through a reluctant parliament last month. Although that’s in line with expectations, it underlines again how little trust Eurozone creditors have in the Athens government.

Over the past few years, the ECB has been willing to overlook the fact that Greece’s sovereign debt is rated as junk and accept it as collateral for its regular credit operations, as long as it is complying with its bailout terms. The Eurozone unlocked billions in bailout loans last week, but the ECB will only start accepting Greek sovereign paper again when Eurozone finance ministers are satisfied that the reforms are going ahead as planned. Greece’s finance minister Euclid Tsakalotos has already indicated that one of the measures requested by the creditors won’t be implemented.