Draghi leaves door open for further ECB stimulus

European Central Bank president Mario Draghi left open the option of further stimulus if the economy continues to deteriorate as investors await the outcome of elections in Greece and France.

While policy makers did not discuss lowering interest rates at a meeting in Barcelona yesterday, Draghi pointed to new growth and inflation forecasts next month that may change the ECB’s policy stance.

Uncertainty about the commitments of future leaders in Greece and France to fiscal reforms, paired with worsening economic data and renewed tensions in financial markets, may force the ECB’s hand.

“There are significant downside risks to the ECB’s growth outlook,” said Joerg Kraemer, chief economist at Commerzbank AG in Frankfurt.

“Draghi indirectly hinted at next month’s ECB meeting when the bank will publish its new projections. Since the ECB may lower its growth forecasts, the rate-cut discussion will stay with us.”

ECB officials, who have flooded financial markets with more than €1tn to avert a credit crunch, have signalled they are reluctant to do more for now as they press governments to enact reforms.

The euro rose after Draghi said policy makers did not discuss lowering the benchmark rate from 1%, already a record low. It climbed as high as $1.3180 from $1.3117 before his press conference started. Investors had increased bets on rate cuts after Draghi last week indicated the ECB was reassessing the growth and inflation outlook.

“We’ve discussed quite extensively the monetary policy stance” which “we found accommodative in view of an economic outlook that becomes more uncertain,” Draghi said.

That suggests the ECB will wait to see how its lending to banks will feed into the real economy, said Jens Sondergaard, senior European economist at Nomura Plc in London.

While there is “a compelling case for further policy loosening,” the ECB will probably “err on the side of hawkishness and delay any rate cuts for as long as possible”, he said. “Economic conditions need to deteriorate significantly in the weeks ahead before the ECB will consider loosening monetary policy further at the June meeting.”

A gauge of eurozone manufacturing plunged in April to the lowest in almost three years, according to London-based Markit Economics.

Eurozone unemployment rose to a 15-year high of 10.9% in March, and an economic confidence indicator published by the European Commission fell last month to the lowest level since December. “We saw stabilising economic activity at low levels in the first three months” of the year. The most recent survey indicators show uncertainty prevailing. We will be clearer in our assessment next month,” Draghi said.


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