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MoneyOpposition Mounts to Draghi's Plans for a Last Stimulus

13:35  10 september  2019
13:35  10 september  2019 Source:   msn.com

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European Central Bank President Mario Draghi ’ s plans for a final burst of monetary stimulus before his term ends is running into opposition , raising the prospect he will have to temper or hold off on launching a bond-buying program. 31, the central banker has signaled plans for a large, final burst

Draghi ’ s Last Stimulus . The European Central Bank chief eases the path for his successor. Mario Draghi signaled Thursday that he won’t be idle in his last months leading the European Central Bank. His gift to successor Christine Lagarde is likely to be a reduction in eurozone interest rates in

Opposition Mounts to Draghi's Plans for a Last Stimulus © Alex Kraus/Bloomberg News

European Central Bank President Mario Draghi hopes to end his eight-year term with a bang. Some fear it could conclude with a fizzle.

In the run-up to his departure on Oct. 31, the central banker has signalled plans for a large, final burst of monetary stimulus to prop up a eurozone economy that is tottering under the pressure of trade tensions.

But critical voices are multiplying, including a growing number from the ECB’s own 25-member rate-setting committee.

Mr. Draghi’s critics say the eurozone economy isn’t weak enough to warrant aggressive new measures just a year after the ECB began phasing out its €2.6-trillion (£2.18 trillion) bond-buying program. Borrowing costs for households, businesses and governments are so low, they argue, that easier money will have little effect. The bank’s key interest rate is already minus 0.4%.

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European Central Bank policymaker Jens Weidmann appeared to drop his opposition on Wednesday to an ECB programme of government bond purchases announced during the euro zone debt crisis, as he sought to improve his position in the race to succeed Mario Draghi as president of the central bank.

They also say the measures Mr. Draghi has flagged—further interest-rates cuts and a new bond-buying program, known as quantitative easing, or QE—risk leaving the bank with virtually no ammunition if the economy sinks further, while also exacerbating the risk of asset bubbles and damage to the region’s banks. Several eurozone governments moved in recent months to rein in excess lending, including France.

“The ECB’s monetary policy is doing its duty, but it can’t do everything, and it certainly can’t perform miracles,” Bank of France Gov. François Villeroy de Galhau said in a recent interview with Swiss media.

The French banker has joined traditional hawks in Germany and other northern European countries in questioning Mr. Draghi’s bold stimulus plans, especially QE.

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“The mounting political opposition to Mr. Draghi ’ s ABS program is a foretaste of things to come,” he said. “If ‘QE lite’ is encountering significant political resistance, then what hope is there for full-blown QE?” Weidmann opposed ABS purchases when Draghi first announced the plan last month.

As he winds up his eight-year term, European Central Bank President Mario Draghi says his legacy isn't dented by the unusual public criticism by some ECB officials of a key part the bank' s last stimulus package. Draghi spoke at his last news conference before former International Monetary Fund.

“With a second asset-purchase program, the ECB will continue disturbing markets, and prices do not reflect the risk anymore,” said Jürgen Stark, the ECB’s former chief economist. “All this is not thought through, just to be activist and show we are not at the end of our toolbox.”

Those objections raise the prospect of a rare defeat at Thursday’s ECB meeting for Mr. Draghi, whose bold new policies held together the fractious currency union during the sovereign-debt crisis. Still, the Italian, who has just two policy meetings left, can usually count on support from a majority of dovish council members, and some sceptics don’t have a vote at this week’s meeting, including Mr. Villeroy de Galhau.

Investors are pricing in a roughly 50% chance of a 0.2 percentage-point rate cut, as well as a program to buy about €30 billion to €40 billion of sovereign debt a month. As a compromise, Mr. Draghi could restart the bond-buying program, but at a slower pace, leaving its current restrictions in place.

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Draghi mentioned at a press conference last week: "As a matter of fact, I understand the Dutch "The Dutch government (has) provided some fiscal stimulus that Draghi asked for. But no big bang. "But given the fact that the government seems to be serious on coming up with a plan for a fund later on

Mario Draghi signaled the European Central Bank probably won’t stop its quantitative-easing program without tapering it first, indicating that the stimulus is likely to run past the The comments keep the central bank on track for a potential extension of its bond-buying program, as predicted by economists.

He could also leave the decision to restart bond buying to International Monetary Fund Managing Director Christine Lagarde, who is set to take the ECB presidency on Nov. 1. Ms. Lagarde said last week that she would reassess the costs and benefits of the ECB’s controversial policy tools.

Opposition Mounts to Draghi's Plans for a Last Stimulus © Reuters Christine Lagarde

Mr. Draghi’s defenders say that it is easier to combat a downturn before it has taken root than to reverse it afterward. New factory orders in Germany fell sharply in July, while Italy’s economy has flatlined.

“If you don’t do anything then you don’t have any side effects, but you don’t have any impact on the economy, either,” Olli Rehn, head of Finland’s central bank and a member of the ECB’s rate-setting committee, said in a recent interview. He called on the ECB to launch a broad package of stimulus measures, including substantial new bond purchases.

The fresh uncertainty over ECB policy underscores the political and economic challenges facing central bankers in responding to the global slowdown that has followed the China-US trade war.

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In a speech to Wall Street investors, the president of the European Central Bank, Mario Draghi , reinforced his promise to do all in his power to push Europe’ s stagnating economy toward a full recovery.

The Federal Reserve is cutting rates. Unlike the ECB, however, the Fed raised interest rates during the expansion, giving it more ammunition to fight a downturn.

The eurozone is especially reliant on loose monetary policy, as it is highly dependent on trade for growth. Germany accounts for the same share of world exports as the US with just a quarter of the population. The weakening of the euro in response to easy money has given exporters a much-needed boost.

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Opposition Mounts to Draghi's Plans for a Last Stimulus

At the same time, eurozone governments have been unwilling or unable to loosen purse strings to stave off a slowdown.

The recovery that Mr. Draghi’s bold policies helped engineer is now at risk, with the region’s economy growing at an annualised pace of just 0.8% in the second quarter and its manufacturing sector in recession.

However, the services sector, which accounts for two-thirds of eurozone output, is resilient, and unemployment is at an 11-year low.

“I find myself surprisingly sceptical, probably for the first time,” Stefan Gerlach, a former deputy governor of Ireland’s central bank, said in an interview. “Draghi does not seem to hesitate to bind the hands of his successor. I’m not sure the economy needs it. I’m not sure it achieves much. Some of the arguments the hawks are making sound sensible.”

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As part of a new bond-buying program, Mr. Draghi has suggested that the ECB could loosen self-imposed rules aimed at ensuring it doesn’t dominate debt markets.

That would trigger opposition in Germany. German Finance Minister Olaf Scholz said last month that he would look into outlawing negative interest rates for retail depositors.

The ECB might also introduce measures to protect eurozone banks against even more negative interest rates. Banks bear the brunt of the policies since they need to keep money on deposit with the central bank, in essence paying the ECB to store their money. Meanwhile, banks have been unable to pass those costs fully on to depositors, who often still receive 0% on savings accounts. The ECB might provide banks some relief by exempting some bank deposits with the ECB from negative rates.

“We are at the end of the efficiency of monetary policy,” France’s finance minister, Bruno Le Maire, said in an interview. “The risks that we are now facing are not related to financial stability [but] how to fuel growth. The response is not only in the hands of the ECB.”

With political pressure rising on central bankers around the world, Mr. Draghi may want to leave Ms. Lagarde with room to maneuver.

“The next ECB president will really need to come up with a game plan to deal with the next downturn,” said Elga Bartsch, head of macro research at BlackRock. “Just turning around and saying, ‘Sorry, we are out of policy options,’ is not going to serve the independence of central banks well.”

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