The European Central Bank President Mario Draghi on Thursday stressed the need for significant stimulus for the euro area economy as policymakers assessed that the outlook was getting worse, especially in manufacturing, which is a crucial sector for the big economies in the bloc.
The central bank left its interest rates unchanged earlier on Thursday and altered its forward guidance to signal that they will be reduced in future, and that policymakers are planning a comprehensive stimulus package.
The ECB staff have been tasked with examining the possibility of further adjustments to forward guidance on policy rates, measures to mitigate the effect of negative interest rates such as a tiering system, and the size and composition of a new asset purchase programme, the bank said.
Economists expect the rate cut to come in September in the form of a 10 basis points reduction in the deposit rate, which is already negative at -0.40 percent.
Following Thursday’s ECB guidance, economists have scaled up their expectations and are now looking for a full-blown stimulus package in September.
“The prolonged presence of uncertainties, related to geopolitical factors, the rising threat of protectionism, and vulnerabilities in emerging markets, is dampening economic sentiment, notably in the manufacturing sector,” Draghi said in his introductory statement to the press conference.
Inflationary pressures remain muted and indicators of inflation expectations have declined, he noted.
“A significant degree of monetary stimulus continues to be necessary,” Draghi added.
Citing recent data, the ECB chief said that growth is set to slow in the second and third quarters, mainly due to global trade tensions, and hence, a rebound in the second half of the year is less likely.
The risks surrounding the euro area growth outlook remain tilted to the downside, Draghi reiterated.
Responding to reporters’ questions, Draghi said the Eurozone “outlook is getting worse and worse”, especially in manufacturing and in those countries where this sector is very important.
However, the bank still sees signs of strength in the economy, he added.
The slow rotation of the Chinese economy and worries regarding a no-deal or hard Brexit are among the factors that are hurting the outlook, the ECB President said.
Earlier on Thursday, the ifo Institute survey showed that the German business confidence weakened to its lowest level in more than six years in July, as companies fear an economic contraction in future.
Further, Draghi said policymakers “do not like what we see on the inflation front”.
Referring to the symmetry in the inflation target, a new term in the ECB policy statement, Draghi said, “Symmetry means that there is no cap at 2 percent, means that the Governing Council will act with the same determination if inflation is above and below 2 percent.”
Regarding the Governing Council meeting, Draghi said there was broad agreement on the current outlook in the policy-making body on the latest decisions, meaning policymakers were not unanimous.
Policymakers did not discuss cutting rates today as they chose to wait for the next ECB staff macroeconomic projections before taking action, he noted.
Further, the Governing Council did not discuss the composition of any future asset purchase programme, Draghi said.
Some rate-setters were also having doubts regarding a two-tier system for interest rates, the ECB chief said.
Once again, Draghi stressed on the need for fiscal policy to support the efforts of monetary policy in aiding the economy. If the economic situation continues to deteriorate, fiscal policy will soon be called to action, he added.
On the U.S. President Donald Trump’s accusation that Europe was engaging in currency manipulation, Draghi asserted that the ECB does not target exchange rates.
Early this month, the IMF Managing Director Christine Lagarde was chosen as the successor to Draghi as ECB President. She will be an outstanding president of the bank, Draghi said.
Draghi, whose term ends in October, will be first ECB President who did not raise interest rates during his tenure.
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