Draghi sets out to show he has tools to fixeconomy : scepticism grows that ECB can raise inflation after year of asset purchases
Mario Draghi faces a daunting challenge at today’s meeting of the European Central Bank, which is expected to make a fresh bid to bolster the eurozone’s lacklustre recovery. The ECB president has to convince sceptics that central bankers still have the tools to increase inflation and that measures such as increased quantitative easing and negative interest rates can bear fruit. “QE has been working, but there is only so much central banks can do,” said Guntram Wolff, director of Bruegel, a Brussels-based think-tank. His comments reflected mounting doubts in the eurozone and beyond about monetary authorities’ ability to grapple with the global threat of deflation. “The benefit of doing more is very low at this stage,” Mr Wolff added. Whether Mr Draghi convinces such doubters will play a big role in ensuring that today’s measures have an impact on the real economy. If individuals do not believe monetary policymakers can raise inflation, they are less likely to demand higher wages. If growth is expected to remain weak for years to come, businesses will be less likely to invest in innovation or new workers and machinery. Mr Draghi and other policymakers face increasing questions about the limits of what monetary policy can do to fix below-par inflation — running at minus 0.2 per cent in the eurozone — and weak global demand. Although the European QE programme was launched a little more than a year ago, the central bank continues to miss its inflation target of just under 2 per cent, as it has done for the past three years — a failure it shares with other central banks. That record has created a widening gulf between partisans of more aggressive action — including distribution of central bank cash known as helicopter drops — and those who maintain that central banks are out of ammunition. Mr Wolff suggested further ECB efforts at stimulus risked becoming a headache for banks, which bore the brunt of the cost of negative rates. “Monetary policy is basically undermining their business model,” he said. QE has clearly had an impact on euro-zone governments, businesses and households that are seeking to borrow. Since central banks started to buy their governments’ debt last March, lending rates in parts of the eurozone’s crisis-hit periphery have fallen closer to levels seen in the stronger core. Bond yields for sovereign and corporate issuers have fallen to record lows: a German bank this week issued debt at a negative yield, meaning its lenders lose money if they hold the bond tomaturity. The eurozone’s economy remains fragile despite the improvement in credit conditions. With inflation turning negative again, there are big doubts that the ECB can hit its target in two years. Unemployment, while it has fallen, remains in double digits and growth is still too weak to create jobs. “Monetary policy is designed to affect the economy by influencing asset prices,” said Salman Ahmed, strategist at Lombard Odier, an investment manager. “There’s no doubt that what central banks have done has worked on markets. “We should not think central banks are out of options — they can print as much money as they like. But their tools are pretty blunt and the way in which they work is pretty opaque. Ideally, we would see more co-ordination between what they are doing and what governments are doing.” Mr Draghi has always maintained that the ECB would be unable to steer the eurozone back to recovery on its own. Governments should carry out root-and-branch reforms to foster stronger growth, he has said, hinting that those with capacity to do so responsibly should spend more. But political problems in countries such as Spain and Ireland, which have both recently held inconclusive elections, have instead put still more pressure on the ECB. The ECB president has said his central bank will not “surrender” to low inflation and that there is “no reason” to think price pressures will be permanently lower than in the past. “We now have plenty of evidence that, if we have the will to meet our objective, we have the instruments,” Mr Draghi said last month. He also said the governing council was “unanimous” in saying it had the power to hit its inflation target, although hawks such as Jens Weidmann, the Bundesbank chief, have cautioned that aggressive monetary easing risks doing more harm than good.