European Central Bank (ECB) president Mario Draghi signalled he’s done enough to battle the sovereign debt crisis, laying the groundwork for an eventual exit from record-low interest rates and emergency lending measures.
Saying the environment had “improved enormously” and there were “many signs of returning confidence in the euro,” Draghi turned the spotlight on “upside risks” to inflation, which is now forecast to remain above the ECB’s two per cent limit this year. That suggests policy makers don’t plan to cut rates further or add to their euro 1 trillion ($1.32 trillion) of long-term loans to banks, economists said.
“The ECB adopted a significantly less dovish tone, dropping anything that could hint at any additional non-standard measure or a further rate cut to come,” said Holger Schmieding, chief economist at Berenberg Bank in London. “Instead, the tone suggests that the ECB expects its eventual next move to be a reversal of some non-standard measures or even a rate rise.”
The ECB’s unprecedented crisis-fighting measures have swelled its balance sheet to more than euro 3 trillion, prompting Bundesbank president Jens Weidmann to write a letter to Draghi warning that the central bank may be taking on too much risk. While the ECB has repeatedly been forced to retreat from exit plans as the debt crisis spread, Draghi indicated he may share Weidmann’s desire for a return to more conventional policy settings.
