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After Stimulus Hint, ECB Chief Under Pressure to Deliver

By on January 26, 2016

FRANKFURT, Germany – Mario Draghi, president of the European Central Bank, has a tricky six weeks ahead of him.

The head of the top monetary authority for the 19-country eurozone helped stem a global stock market slide last week by indicating the ECB could provide more stimulus at the next meeting in March.

That was a big deal for markets, but for Draghi it may have been the easy part.

Draghi now has the challenge of backing up words with action. He must defuse a restless minority of stimulus skeptics on the bank’s 25-member governing council and come up with something convincing – or risk disappointing the already frazzled financial markets, triggering another drop in stocks.

The ECB left its stimulus programs unchanged last week, but Draghi said it would review the possibility of more stimulus on March 10. And he repeated several times there was “no limit” to the stimulus tools the bank could use.

Analyst Carsten Brzeski at ING-DiBa said those comments “make it extremely hard not to act. Disappointment is in the cards anyway, but not to act at all would be a big disappointment.”

That’s partly what happened in December. Draghi had made similar hints of big stimulus ahead of the Dec. 3 meeting. But at the meeting, the ECB provided less stimulus than expected and stock markets slumped.

The central bank is trying to push up inflation, which is considered way too low at 0.2 percent annually, and which could fall below zero due to the oil price plunge. At its December meeting, it extended its 60 billion euros ($66 billion) in monthly bond purchases by six months, but declined to increase the monthly amount. It also declined to cut the rate on deposits left at the central bank by commercial banks, currently minus 0.30 percent. That negative rate is aimed at pushing banks to lend money rather than hoard it.

Here are the factors that will determine whether Draghi can win over the skeptics, satisfy markets, and implement his plans to get the economy chugging at full speed.


The bank president is out campaigning publicly against those on his board who want to hold back on stimulus. Skeptics fear too much can create bubbles in the markets or reduce the incentive for governments to make reforms.

“Now they warn us about side effects and risks of what we’re doing… what I never hear them discuss is the risks of doing nothing,” Draghi said in a speech Monday.

He argues that the ECB must act to reach its inflation goal or lose credibility.

Economist Ulrike Kastens at private bank Sal. Oppenheim points out Draghi’s ability to pull skeptics along with him on past decisions, including the Dec. 3 stimulus expansion. “In the past, it has always been the case that he subsequently delivered,” she said.


A leading skeptic has been Jens Weidmann, the head of Germany’s national central bank. He has warned recently that “extreme low interest rates” take pressure off EU member governments to balance budgets and reform their economies, “fostering an illusion of sustainability.”

Weidmann appears to have some like-minded colleagues in Klaas Knot, the head of the Dutch central bank, and Sabine Lautenschlaeger, a former Bundesbank colleague and now a top ECB official. Estonia’s Ardo Hansson has also made skeptical comments.

While critics are a minority, the bank likes to operate with a broad consensus behind its policies. Too many dissidents could push Draghi to scale back.


Opposition to stimulus could be overcome by data showing the ECB falling farther and farther behind in its fight to boost inflation.

Economist Kastens said Draghi’s critics remain in the minority and that “there is already a broad majority that will vote for further monetary loosening.”

She said inflation data for January and February will be out before the next meeting, as well as business surveys that could suggest growth is weakening. Disappointing readings would bolster the argument in favor of adding stimulus.

At the March meeting, the council will also have new inflation forecasts compiled by their own internal staff. Those could slash the inflation outlook for this year a long ways from the current 1.0 percent.

Analysts Frederik Ducrozet and Nadia Gharbi at private bank Pictet Group estimate the 2016 figure will be slashed to 0.1 percent.

They expect the bank to respond by cutting the deposit rate by 0.10 percentage points and increasing the monthly bond purchases by 20 billion euros ($22 billion).

Other data will be scrutinized for signs that plunging oil prices and slower growth in China are not just affecting inflation, but growth as well.

Germany’s Ifo index of business optimism slipped in January, which “strengthens the case for action in March,” wrote Berenberg Bank chief economist Holger Schmieding.

“If a dent in the outlook for the real economy now adds to the arguments for a further monetary stimulus, the swing voters on the ECB council may reconsider.”

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