0909 GMT May 26, 2019
The European Central Bank is preparing to respond to the slowdown with more monetary stimulus, most likely by extending its commitment to keeping interest rates at record lows past the end of 2019 and further into 2020 — well beyond Draghi’s term in office, FT reported.
But the hunt is on for additional policy options in case the stuttering growth persists — and those who would succeed Draghi as ECB president are keen to show they can provide them.
Since taking the helm at the eurozone’s monetary guardian in 2011, Draghi and members of his inner circle have acted aggressively to hold together an often disparate monetary union. The flipside of his dominance was that at times the heads of the region’s central banks took a back-seat role in policymaking.
The impending departure of the man who has shaped eurozone monetary policy for the past eight years gives the bank an opportunity on a search for fresh ideas.
With just a couple of months before the decision is expected to be made by EU heads of state at a summit in mid-June, some of the leading candidates are stepping out of the Italian’s shadow to compete for the attention of national capitals.
Of the leading candidates, only Benoit Coeuré, a member of the bank’s executive board, has been a key figure in the Draghi era’s crisis response.
Coeuré, with a reputation for understanding the region’s financial markets and the political dynamic between Berlin and Paris, is the preferred candidate of many ECB-watchers and would represent a continuation of Draghi’s ideas.
The ECB board member “has been instrumental” in weighing in with ideas to help the bank combat the region’s economic woes, said Frederik Ducrozet, economist at Pictet Wealth Management.
But he may not have the political support needed to override EU laws that prevent board members from serving more than eight years on the bank’s executive board.
One of the main debates among policymakers is whether to compensate banks for charges associated with negative interest rates — an idea proposed this year by Banque de France governor François Villeroy de Galhau. His push for a tiering system for negative deposit rates — now at minus 0.4 percent — has attracted economists’ attention.
By agreeing to hand back to banks some of the €7.5 billion they pay each year on deposits with central banks in the single currency area, the ECB could have more room to cut interest rates, Villeroy de Galhau argues.
However the idea is unpopular with parts of the governing council, including some of Draghi’s inner circle. Klaas Knot, the head of the Dutch central bank who is also in the running for the top job, has publicly criticized it.
Another stimulus option would be to let inflation run above its target of below but close to two percent for a limited period, a possibility that Draghi noted this month. This idea has been mooted by Bank of Finland head Olli Rehn.
Rehn’s call for a review of how to keep prices stable follows a similar initiative by the US Federal Reserve.
“The most recent update of the ECB’s monetary policy strategy took place in 2003 — before the financial crisis and other subsequent events and changes,” the Bank of Finland governor said in March, adding that a review would not question why the bank targeted low levels of inflation and instead would focus on “guiding principles, key assumptions and tools used for the implementation of monetary policy”.
ECB watchers view the idea of a review as welcome, but think any change would take years.
“The redefinition of the bank’s price stability mandate as close to but below two percent took many years before it was officially endorsed in 2003,” said Ducrozet. “This kind of change could take even longer, or it could be that another major crisis is needed for the ECB to embark on such a quantum leap.”
Others in the race are Bundesbank president Jens Weidmann — a policy hawk — and former Bank of Finland chief Erkki Liikanen, who played a key role in reshaping banking regulation after the financial crisis.
Weidmann’s appointment would mark a major change from the Draghi era, while Liikanen is thought to offer greater policy continuity.
“Whoever takes over will have big shoes to fill — the credibility [he] built up gave Draghi the ability to act decisively,” said Seamus Mac Gorain, head of global rates at JPMorgan Asset Management. “[They] may have to work harder to build a consensus, and so act less decisively, which is a concern given the economic and political storm clouds hanging over the eurozone.”