MNI REVIEW: Exit the Draghi, As ECB Unchanged

By Luke Heighton

     FRANKFURT (MNI) - Mario Draghi became the first European Central Bank

president never to raise key interest rates, Thursday, as the Governing Council

kept monetary policy unchanged following its September package announcement.

     Incoming data since the last meeting confirmed the ECB's assessment of

protracted weakness in growth dynamics, said Draghi, who will step down at the

end of the month, and will be succeeded by Christine Lagarde. But ongoing

employment growth and increasing wages continue to underpin resilience to

prominent downside risks and muted inflation pressures.

     Draghi downplayed the depth and breadth of division among Governing Council

and Executive Board members over last month's controversial decision, the

aftermath of which saw prominent central bank governors publicly break ranks.

Draghi said he himself did not intervene in response to critical statements from

Klaas Knot, of the Netherlands, and Bundesbank chief Jens Weidmann, among

others, and that today's decision had passed "basically unanimously." One of

September's dissenters even called for a greater show of unity, and another said

it was time to "let bygones be bygones," Draghi said.

     The main threat to financial stability, he said, is a downturn in the

economy, "whether it is global or in the euro zone." "The lower likelihood of a

hard Brexit has improved the situation, but the uncertainty is still there," he

added.

     The fall in the natural rate of interest rates meant that rates were likely

to remain low for a long time he said.

     "The paradigm of reference has changed. Interest rates will stay low for a

long time, so the exit from unconventional monetary policy has shifted in time."

     Asked whether the ECB would need to adjust its sovereign bond-buying

threshold of a maximum 33% of stock in order to facilitate quantitative easing

in the medium-term, Draghi said that it would take "quite a bit of time before

issuer limits become a problem." Moreover, any such estimate relies on

assumptions about net issuance, and therefore fiscal policy."

     Draghi reiterated that the overall assessment of the ECB's negative rates

"is positive. The improvements in the economy have more than offset the negative

side effects." However, "in order to reap the full benefits from our monetary

policy measures, other policy areas must contribute more decisively," he

continued. If one wants to see higher rates sooner, fiscal policy should be

active."

     Euro area real growth GDP growth stood at 0.2%, quarter on quarter, in Q2

2019, following a 0.4% increase the previous quarter, with incoming economic and

survey data pointing to "moderate but positive" growth in the second half of

2019.

     Annual HICP inflation fell from 1.0% in August 2019 to 0.8% in September,

with Draghi saying that events and data since the Governing Council's Sept. 12

decision showed they were justified in taking "decisive" action.

     Draghi said the fact Greece had recently sold short-term debt at a negative

yield should be considered a success for the ECB's strategy, given that the

country had to be bailed out only years ago.

     He described Germany's Isabel Schnabel, recently named as Sabine

Lautenschlaeger's replacement on the Executive Board, as "an excellent

economist. She has all the capacities to do very, very well. We should welcome

her nomination very warmly."

--MNI Frankfurt Bureau; +49-69-720-146; email: luke.heighton@marketnews.com

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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