ECB's Draghi Urges More Fiscal Policy Support To See Higher Rates

The outgoing European Central Bank President Mario Draghi on Thursday stressed the need for a more active fiscal policy in the euro area to help create a conducive environment to raise interest rates in future.

In his final post-decision press conference, Draghi said, “If one wants to see higher rates sooner, fiscal policy should be active.”

“With fiscal policy, the monetary policy objective will be reached sooner with less side-effects,” Draghi told reporters. 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.

But Draghi’s decisions raised several eyebrows in his eight-year term 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. Earlier on Thursday, the ECB maintained interest rates and its stimulus measures, including asset purchases and forward guidance, unchanged. “The mildly expansionary euro area fiscal stance is currently providing some support to economic activity,” Draghi said in his introductory statement. Citing the weakening economic outlook and the persistence of downside risks, the ECB chief urged “governments with fiscal space” to act in “an effective and timely manner”. “All countries should intensify their efforts to achieve a more growth-friendly composition of public finances,” Draghi said. Risks surrounding the euro area growth outlook remain on the downside, he said, adding that the weak growth momentum is delaying the pass-through of labor cost pressures to inflation. The main risk is a downturn in the economy, whether global or domestic, the central banker added. While the lower likelihood of a hard Brexit has improved the situation, the uncertainty remains, he warned. Regarding negative rates, Draghi said the overall assessment was positive as the improvements in the economy more than offset the adverse side effects.

“The Governing Council reiterated the need for a highly accommodative stance of monetary policy for a prolonged period of time,” Draghi said.

The Italian economist is set to handover the reins of the ECB to former IMF Managing Director Christine Lagarde on October 31.

Draghi, the savior of euro who is known for his buzzwords “whatever it takes”, leaves behind a legacy marred by controversy. His 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 in September.

The latest stimulus package failed to get the full backing of the Governing Council and the policy-making body has never seen such a major divide in views.

However, Draghi defended the stimulus measures on Thursday, telling reporters that “Unfortunately everything that has happened since September has shown abundantly that the Governing Council’s determination to act was justified.”

Quizzed on the rift in the Governing Council, Draghi took it lightly. He told reporters that Thursday’s decisions were unanimous.

Under the former French finance minister Lagarde, it is widely expected that the ECB monetary policy strategy will under go a major overhaul.

Responding to questions regarding his role as ECB chief, Draghi said, “If there is one thing that I’m proud of then it is that we have always pursued our mandate. Never give up.”

The experience as ECB President has been “intense, profound, and fascinating”, Draghi added. He said he felt like he tried to comply with the policy mandate in “the best possible way”.

Draghi also showered praise on the ECB staff and expressed gratitude for their contribution to the debates in the policy sessions.

“The popularity of the euro has never been so high,” the outgoing ECB chief said.

The material has been provided by InstaForex Company – www.instaforex.com