European Central Bank President Mario Draghi said Tuesday that while the Eurozone debt crisis was not over, progress in “rebooting” the financial system was making monetary policy more effective.
Speaking at the Paris Institute of Political Science, Draghi said that the turning point of the crisis was the June 2012 summit when European leaders decided on a recovery strategy based around the creation banking union.
“The crisis is not over,” Draghi said. “The recovery strategy is being, and must continue to be, executed with commitment and perseverance,” he said.
Draghi said that as financial fragmentation continued to ease in response to the OMT and to Eurozone bank deleveraging and restructuring, monetary policy was becoming more effective.
“We are already seeing evidence of that process,” Draghi said. “Deposit rates in the euro area have been converging towards our policy rate. And banks that are more advanced in their balance sheet adjustment have been better able to reflect our policy impulse in their lending volumes and rates,” he said.
Draghi also reiterated the Bank’s policy of forward guidance, which indicates that key rates will remain at present of lower levels for an extended period of time. He added that rates will remain low even if inflation in the currency area accelerates from its record-low pace of 0.7%.
The policy, Draghi said “supports the economy today by steering expectations about the future. In particular, our forward guidance implies that short-term real rates, which are negative today, will become even more negative in the foreseeable future.”
“This is because our policy rates will remain low or lower in nominal terms, while inflation is projected to gradually pick up,” he said. “In turn, expectations of lower short-term real rates are reflected in the level of medium-term real rates, those that are most relevant for investment decisions by entrepreneurs. In this way, our guidance on the level of rates tomorrow, and the day after tomorrow, supports investment today.”