Mario Draghi, president of the European Central Bank (Photographer: Alex Kraus/Bloomberg)

Draghi Makes Sure Stimulus Lives On Even After He Leaves the ECB

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Mario Draghi’s latest stimulus salvo means his successor as European Central Bank chief may not be forced into the kind of monetary policy U-turn he once faced.

The president, who began his eight-year term reversing course on a recent interest-rate increase by his predecessor, has set in place the conditions to keep the euro zone in easing mode until he leaves office. That saves his successor from having to restart stimulus that Draghi concluded last year, in case the region’s economy deteriorates.

Draghi Makes Sure Stimulus Lives On Even After He Leaves the ECB

Averting an about-face skirts a subsequent communication challenge for whoever replaces the Italian at the ECB’s helm in November. It may also limit a nagging stigma of policy mistakes that the Frankfurt institution in particular has struggled to forget -- including aborted attempts at raising interest rates in 2008 and 2011 when counterparts including the U.S. Federal Reserve were doubling down on easing.

“The economy is in difficulty and underlying inflation has been stubbornly low so the policy response was necessary,” said Ken Wattret, an economist at IHS in London. “The person taking over will be constrained to some extent but probably constrained by the ECB having done the right thing, not the wrong thing.”

The ECB ended quantitative easing in December, and was on track to begin raising interest rates as soon as September, until that plan was derailed by the region’s economic slowdown.

In its place, the Governing Council pledged another round of loans for banks and promised to keep ultra-low borrowing costs in place for at least the rest of the year.

Changing Course

While that stance means Draghi is now certain never to raise interest rates as ECB president, it may also mean his successor won’t have to cut them again right away.

That was Draghi’s experience. On his third day in office in November 2011, the new president announced a quarter-point reduction in borrowing costs that reversed an increase delivered just four months previously under Jean-Claude Trichet. That move, together with another cut five weeks later, heralded an unprecedented easing cycle to avert deflation that the ECB has extended to this day.

What Draghi will bequeath to his successor is an economy still struggling to sustain inflationary pressures, and a much-enhanced but also depleted monetary-policy toolbox to respond to future downturns and crises. The current president has led the creation of new instruments to stimulate growth and encourage lending, from negative interest rates to quantitative easing, which he has used to the point of exhaustion.

Draghi Makes Sure Stimulus Lives On Even After He Leaves the ECB

The central bank chief who gets to wield those blunted tools is yet to be determined by governments, who are likely to pick a successor some time after European Parliament elections in late May.

Just as it was with Draghi, it’s probable the next president will be selected from among the current members of the Governing Council. That means that whatever policy juncture they end up confronting, it will be one they had a hand in creating. After all, Draghi himself -- as Bank of Italy governor -- backed the 2011 increases that he ended up having to reverse.

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