Two days after assuming office in one of the most turbulent phases in the history of the euro zone, Mr. Draghi signaled that he might be more willing than his predecessor, Jean-Claude Trichet, to tolerate inflation in the name of economic growth. The bank cut the benchmark rate to 1.25 percent from 1.5 percent, a move aimed at putting more money into the European economy by making borrowing easier.
Investors cheered the decision by pushing stocks higher in Europe and the United States.
The cut, which surprised some analysts, may signal a shift in strategy — or at least in tone — at the bank, which oversees monetary policy for the 17 European Union nations that share the euro. Known for his caution, Mr. Draghi, formerly the governor of the Bank of Italy, was not expected to make bold moves so soon.
But speaking to reporters after he presided as chairman of the bank’s governing council for the first time, Mr. Draghi indicated that he felt he had little choice but to reduce interest rates. He warned that economic growth was likely to be significantly worse than the bank expected. That assessment came a day after the Federal Reserve also reduced its growth forecasts through 2013.
While campaigning this year to succeed Mr. Trichet, Mr. Draghi emphasized his credentials as an inflation fighter and as a voice of fiscal prudence in his native Italy. But on Thursday, he played down the risks posed by inflation, which at a current annual rate of 3 percent is above the bank’s target of about 2 percent. Slower growth, he indicated, would act as its own curb on inflation.
“In such an environment, price, cost and wage pressures in the euro area should also be moderate,” he said. “Today’s decision takes this into account.”
At the same time, though, Mr. Draghi disappointed those who want the bank to help calm skittish global investors by aggressively buying European government bonds, using its ability to print money to reduce the risk that the Greek crisis might create a contagion infecting Italy, Spain and others. He stuck to the position that the bond purchases the bank has been making since the spring of 2010 were temporary and limited, and justified solely as a way for the bank to maintain its control over interest rates.
Rather, Mr. Draghi said, it was up to national leaders to regain investor confidence by reining in spending and removing excessive regulations and other obstacles to growth. “The first and foremost responsibility for maintaining financial stability lies with national economic policies,” he said.
Mr. Draghi’s statements on bond market intervention led some analysts to conclude that, despite the rate cut, he would not veer significantly from the path set by Mr. Trichet. Mr. Draghi described his predecessor on Thursday as a “role model.”
The bank has spent 173.5 billion euros, or $240 billion, intervening in bond markets since May 2010, a modest sum compared with the securities purchases made by the Fed or the Bank of England to help prop up their own financial markets and stimulate their economies.
“The E.C.B. seems to be continuing to play its dangerous game of doing the minimum amount possible, counting on the European politicians to extinguish the fire,” Jens Sondergaard, an analyst at Nomura, wrote Thursday in a note to clients.
Still, some analysts said that Mr. Draghi’s statements on bond buying should not be taken at face value and that the bank would intervene if necessary to save the euro.
“If worse came to worst, the E.C.B. would buy government bonds on a massive scale,” Jörg Krämer, chief economist at Commerzbank in Frankfurt, wrote in a note.
But Mr. Draghi cannot say that out loud, the thinking goes, for fear that leaders like Prime Minister Silvio Berlusconi of Italy would renege on promises to remove barriers to competition and improve economic performance.
“It is understandable that they don’t want to give governments a free lunch,” said Marie Diron, a former European Central Bank economist who advises the consulting firm Ernst Young.
Article source: http://www.nytimes.com/2011/11/04/business/global/european-central-bank-cuts-rates-hoping-to-avert-downturn.html?partner=rss&emc=rss
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