LONDON (Reuters Breakingviews) - Mario Draghi’s ultra-loose monetary policy will outlast his tenure as European Central Bank president. The Italian will finish his eight-year term at the end of October without once having raised interest rates. As he heads for the exit, he is putting easing back in play.
Draghi said on Thursday the ECB would keep rates at their current record lows through the first half of 2020, longer than previously planned. While that was a surprise, investors initially took his comments to mean that policy rates would neither rise nor fall before then. That was before the ECB boss said some of his colleagues on the central bank’s governing council had raised the possibility of further rate cuts, while others had mooted the idea of restarting asset purchases.
The euro, which initially rose above $1.13, fell more than half a U.S. cent from its peaks as a result. And the EURO STOXX Banks Index fell 1.8%, more than reversing earlier gains of 1.5%. The see-sawing financial stocks highlight the problem that Draghi bequeaths his successor.
The ECB may well have to loosen monetary policy again. Draghi several times cited geopolitical uncertainty and protectionism as among the headwinds facing the euro zone economy. If these risks materialise, inflation may drift further below the central bank’s target of just below 2%. A market measure of long-term price expectations, called the five-year/five-year forward, hit record lows around 1.25% on Thursday.
But sustained sub-zero rates are bad for the banks on whom the ECB relies to extend credit to households and businesses. True, the central bank is doing what it can to help lenders. The terms of its new targeted longer-term refinancing operations, which were unveiled on Thursday, were at the generous end of the spectrum of what was expected. But that’s slim comfort for banks, whose net interest margins – the difference between the rate at which they borrow and the rate at which they lend – have been squeezed.
Draghi said there had been some discussion about whether negative rates, and guidance that they would remain that way for some time, was hurting banks’ profitability. The broad consensus at the ECB was that this was not so far the case. It will be up to Draghi’s successor to figure out when this problem surfaces and how to head it off.
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