ECB Preview: Draghi To Bid Adieu Amid Policy Split

European Central Bank President Mario Draghi will be chairing his final monetary policy meeting on Thursday, but the savior of euro known for his buzzwords “whatever it takes”, leaves behind a legacy marred by controversy.

Draghi, who is set to handover the reins of the ECB to former IMF Managing Director Christine Lagarde at the end of the month, is unlikely to announce any monetary policy change after the Governing Council meeting.

The Italian economist’s departure comes at a time when growth in the 19-nation euro area is sagging and inflation is far away from the ECB’s goal of “below, but close to 2 percent”.

And it is this worrying economic picture that prompted Draghi to unveil a host of stimulus measures in September, the effectiveness of which are increasingly being doubted. The euro area economy is facing a prolonged sag than was expected earlier, he told lawmakers.

Under Lagarde, a former French finance minister, it is widely expected that there is likely to be a change in strategy in ECB monetary policy.

The latest stimulus package included a fresh round of bond purchases and a 10 basis points cut to the deposit rate to -0.50 percent as well as the introduction of a tiering system for reserve remuneration that will exempt part of banks’ excess liquidity holdings from the negative deposit facility rate.

However, the stimulus measures failed to get the full backing of the Governing Council and the policy-making body has never seen such a major divide in views. The hawks on the Governing Council have been quite vocal this time. Much worse, the German member on the ECB Executive Board, Sabine Lautenschlager, quit her post late September. The German government on Wednesday nominated an economics professor Isabel Schnabel to the ECB executive board as the replacement for Lautenschlager. The ECB decision announcement is due at 7.45 am ET on Thursday and Draghi is set to begin his customary post-decision press conference at 8.30 am ET. The bank is widely expected to leave interest rates and stimulus measures unchanged, and reaffirm its forward guidance. Eurozone interest rates were raised last in July 2011 by 25 basis points and Draghi is set to be the only ECB chief thus far who did not raise interest rates.

Draghi’s decisions also raised several eyebrows as he was bold enough to undertake several unconventional measures at the ECB, mainly asset purchases and negative interest rates, which were inconceivable in the euro area years ago. In the press conference, Draghi is likely to be grilled by reporters with questions over the divide in the Governing Council. However, he is widely expected to downplay such concerns. “We expect Draghi to come up with a strong (emotional) plea in support of the September package, probably combined with a broader attempt to safeguard the legacy of all measures taken under his leadership,” ING economist Carsten Brzeski said. “Draghi will probably also stress the fact that the ECB’s unconventional measures did have a significant impact on growth and inflation over the last few years, thereby justifying the September package.”

The material has been provided by InstaForex Company –