Draghi still searching for ‘bazooka’

The consensus view is that the ECB will keep the main interest rate on hold today, but its president Mario Draghi may signal the he is looking at unconventional ways of boosting lending to the wider economy.

There is a compelling argument for introducing a rate cut at today’s meeting. Inflation remains subdued and economic activity, particularly bank lending, is stuck at stubbornly low levels. But Mr Draghi has noted on several occasions that the European banking system remains fragmented.

“The ECB’s main concern is not the absolute level of its policy rate but the continued fragmentation of bank lending rates, particularly for SMEs. However, up to now, the ECB has not been able to come up with a technically — and politically — acceptable bazooka to boost lending to SMEs. In fact, when assessing possible policy options to stimulate the economy, the ECB faces a new dilemma: choosing a rather ineffective but politically acceptable rate cut or an effective but politically controversial lending bazooka,” says Carsten Brzeski, an economist with ING bank in Brussels.