Mario Draghi, president of the European Central Bank (ECB), reacts during a rates decision news conference in Frankfurt, Germany. (Photographer: Alex Kraus/Bloomberg)

Mario Draghi Sounds Economic Alarm for the Euro-Area

(Bloomberg) -- Mario Draghi intensified his warning on the challenges facing the euro-area economy, signaling the European Central Bank could be even more cautious about any withdrawal of crisis-era stimulus this year.

After holding off in December from fully downgrading his assessment, the ECB president finally caved on Thursday by saying the risks to growth “have moved to the downside.” That’s a significant change from six weeks ago, when he described the risks as “broadly balanced” and capped monetary support.

What Our Economists Say...
“The Governing Council is getting increasingly concerned about emerging weakness in the euro area. It confirms that the first rate hike is unlikely to take place before December and that ECB forecasts will be revised down in March.”
-- Maeva Cousin, David Powell and Jamie Murray, Bloomberg Economics. See their ECB REACT.

The euro briefly dropped to its lowest level of the year before recovering after Draghi signaled that there’s no case yet for a new round of long-term loans for banks -- a move which could be seen as monetary easing. The single currency was down 0.2 percent on the day at $1.1361 at 3:18 p.m. Frankfurt time.

Key Insights

  • Draghi said that the “persistence of uncertainties in particular relating to geopolitical factors and the threat of protectionism is weighing on economic sentiment.”
  • He added that while the change in language was decided unanimously, the Governing Council didn’t discuss its implications for policy. “Today’s meeting was essentially an assessment: where are we? Why are we here? How long will the slowdown last?”
  • Draghi said policy makers were also united in the view that the likelihood of a euro-zone recession as being low, while acknowledging that a serious downturn in one part of the bloc could spread.
  • The ECB earlier repeated its expectation that borrowing costs will stay at present levels through the summer, and that it will continue reinvesting proceeds from maturing bonds for “an extended period of time past the date” of its first rate increase.
  • Draghi said the topic of a new round of long-term funding for banks was raised but no decision was taken, and such a measure would require “a good case for monetary policy.” Long-term loans would help banks meet regulatory standards and support their lending to businesses and households.

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  • Central banks across developed economies have braced for further weakening by signaling they will remain responsive to uncertainties, with the U.S. Federal Reserve all but promising to slow the pace of its rate increases.
  • Fresh economic data on Thursday underlined the picture of a weakening economy, with German manufacturing shrinking and euro-area Purchasing Managers Indexes pointing to the worst performance in more than five years.

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