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ECB renews vow to hold rates at historic low until inflation picks up

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Via Financial Times

Mario Draghi wrapped up his final monetary policy meeting at the European Central Bank by leaving interest rates unchanged and sticking to the existing package of loosening measures he announced last month.

The ECB had been widely expected to leave policy unchanged after it triggered a fierce debate last month by cutting interest rates to minus 0.5 per cent and restarting its quantitative easing programme to purchase bonds following a 10-month hiatus.

The ECB said in a statement: “The governing council expects the key ECB interest rates to remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2 per cent within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics.”

In a press conference after the announcement, Mr Draghi called on eurozone governments to enact reforms to improve productivity and labour markets, and to use fiscal policy to further stimulate the bloc’s economy.

“All countries should intensify their efforts to achieve a more growth-friendly composition of public finances,” the ECB president said.

Frederik Ducrozet at Pictet Wealth Management said Mr Draghi had become “the first president to leave the ECB without ever having raised interest rates”, adding that he had cut rates eight times, never increased them, and doubled the size of the ECB’s balance sheet by buying bonds.

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Mr Draghi’s successor Christine Lagarde attended the meeting too, although she did not participate in the discussions, Mr Draghi said. The central bank’s decision to hold fire in the final meeting of its governing council before Mr Draghi hands over to Ms Lagarde at the start of next month came amid more gloomy signs for the eurozone economy.

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The latest eurozone business sentiment survey, published earlier on Thursday, showed a slight month-on-month rise in October but remained only just above the 50 mark that separates growth from contraction.

Eurozone inflation last month fell to a three-year low of 0.8 per cent, well below the ECB’s target of below but close to 2 per cent, and is likely to fall further in the final quarter of the year, Mr Draghi said. Earlier this week, the Bundesbank warned that a slide in German manufacturing and exports may have dragged the country into recession in the third quarter.

Recent data reinforce the ECB’s assessment of the economic risks as trade-related woes dampen investment growth, Mr Draghi said, although areas such as the services sector and wage growth continue to underpin the eurozone economy.

Mr Draghi defended the ECB’s recent loosening measures, saying they were needed in response to a sharp drop in economic growth that has caused inflation to fall even further below the central bank’s core objective.

He rebuffed suggestions that negative rates were doing more harm than good, saying that negative rates had stimulated the economy and boosted employment; the economic improvements had “more than offset” any negative consequences but the ECB was monitoring the longer term risks, he added.

But the measures have divided the ECB governing council. The heads of the German, French, Dutch and Austrian central banks, who are all members of the council, publicly expressed their opposition to the central bank’s open-ended plan to buy €20bn of bonds a month starting from November, which many of them argued was excessive.

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“Mr Draghi has taken the ECB’s technocratic mandate for safeguarding the euro as far as it can go against the political constraints,” said Lena Komileva at G+ Economics.

“This calls for strong political leadership to move the policy boundaries of the possible towards a different economic outcome of strong growth, dynamic capital markets and debt sustainability,” she said, adding that Ms Lagarde was “the right person, perhaps the only person, to take this baton forward”.

Recently most of the dissenters have tried to bury the hatchet by looking ahead to the big issues likely to occupy Ms Lagarde from next month. But economists say the public backlash weakens the ECB’s credibility and could make it harder for Ms Lagarde to loosen monetary policy further in the future.

Mr Draghi is preparing for a leaving ceremony on Monday that will include speeches by European Commission president Jean-Claude Juncker, German chancellor Angela Merkel and French president Emmanuel Macron, as well as a musical performance.

The 72-year-old Italian economist is widely credited with shoring up faltering support for the euro during the region’s crippling debt crisis by promising to do “whatever it takes” and then cutting interest rates into negative territory and buying €2.6tn of bonds.

But he has also attracted criticism. Banks and insurers complain that negative interest rates have a corrosive impact on their business models.

Critics argue the ultra-loose monetary policy has inflated asset bubbles, allowed profligate southern European countries to avoid necessary structural reforms and kept zombie companies alive that would otherwise have collapsed.

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