European Central Bank President Mario Draghi has said that quantitative easing is a strategy option that falls within the Bank’s mandate and could be used if inflation expectations were to deteriorate over the medium term.
However, in an interview published Saturday by the Dutch daily ‘De Telegraaf’, Draghi also said that he and his Governing Council colleagues were first prioritizing the impact of the package of rate cuts and liquidity support announced earlier this month.
Quantitative easing “is indeed possible within our mandate, namely if the purchases are aimed at ensuring price stability,” Draghi told the paper. “We are not permitted to provide Member States with monetary financing.”
When asked if he was confident he could gather unanimous support for the deployment of QE, Draghi said that “any guess would be premature. Quantitative easing can include not only government bonds, but also private sector loans. We will discuss that when the time comes.”
The ECB President repeated the view that, while concerned about low inflation, he and his colleagues were not seeing deflation around the currency area.
“We have not seen any deflation in the sense of prices declining across the whole spectrum in the euro area, with households and firms postponing consumption and investment because they are waiting for lower prices,” he said. “What we do see is that low inflation persists for a long time. If it lasts too long, adjustment in the crisis countries is made more difficult. In a situation of low inflation, wages in these countries need to really decline in absolute terms in order to improve their competitiveness.”
As a result, Draghi explained, key rates in the Eurozone would remain low for an extended period of time following the Bank’s decision to take its refinancing rate to a record-low 0.15% and its deposit facility to -0.10%.
“”We have prolonged banks’ access to unlimited liquidity up to the end of 2016,” Draghi added in reference to the extension of fixed term, full allotment liquidity support for Eurosystem lenders. “That is a signal. Our programme in support of bank lending to businesses will continue for four years. That shows that interest rates will remain low over a longer period. But thereafter they will increase when the recovery will firm up.”
When asked how tightening monetary policy in the United States would impact the ECB’s thinking, Draghi replied: “We will have to wait and see what happens, but the extension to the end of 2016 is a signal. Incidentally, the United States has reduced the growth figure for the first quarter.”
In other remarks, Draghi admitted he and his colleagues were “surprised” to some degree by the way the markets reacted to his 2012 speech in London during which he pledged to do “whatever it takes” to save the single currency, a statement that eventually led to the creation of the Bank’s most controversial monetary policy tool: Outright Monetary Transactions, or OMTs, which are currently undergoing a thorough legal review by the European Court of Justice.
“The markets reacted in a way that made it unnecessary to use the programme,” Draghi said, but added that “In order to be credible, we also had to be sure that we could actually use the instrument. We were not bluffing, most certainly not.”
Asked if he felt the market reaction, and the significantly lower bond yields that followed, have acted as a disincentive to the reform efforts of some member states, Draghi was guarded.
“We have a mandate to safeguard price stability. We are not responsible for how politicians make use of the time they have,” he said. “I do not want to mix the responsibilities of the central bank with those of governments. But look at the extent of the reforms undertaken by governments since 2012. You will then need to admit that considerable progress has been made.”