The European Central Bank is ready to act to aid the eurozone economy if needed, while signs of market stabilization mean interest rates are becoming a more effective tool again, ECB chief Mario Draghi said on Tuesday.
Speaking in Jerusalem at a farewell conference for Bank of Israel Governor Stanley Fischer, Draghi said there were numerous measures the ECB could and would deploy if needed, and that it was ready to tackle any unintended consequences.
"We have been able to regain better control of monetary conditions in the euro area economy, which is very important for providing the appropriate monetary policy impulse to the economy," Draghi said in a speech.
The ECB president said the transmission of its monetary policy was on the mend, so that all corners of the eurozone could benefit from low interest rates, currently 0.5 percent.
His comments surprised some economists.
"I am not sure I get what the ECB tries to convey with this," said Deutsche Bank senior European economist Gilles Moec.
"It was vital to compress sovereign bond spreads and this has been achieved very efficiently by the ECB. But there is still no clear sign of impact ... on actual origination of credit to households and businesses."
The ECB has discussed options including cutting its deposit rate into negative territory at recent meetings but decided such moves were not justified despite tough lending conditions for households and companies in the eurozone's crisis-hit south.
Data this month showed borrowing costs rose further in April for small businesses in Italy and Spain, while the amount banks in those countries lent to local firms declined.
"Draghi's comments highlight that the ECB has not run out of ammunition and still has sufficient fire power to stimulate the economy if needed even though interest rates are close to zero," said Tobias Blattner, economist at Daiwa Capital Markets.
Draghi said the calming effect on markets of the ECB's bond-buying pledge last summer and economic reform had eased the emergency settings which have undermined the central bank's influence on borrowing costs for eurozone firms and households.
It was important to note that economic and financial fragmentation in the euro area had gone down significantly since last summer, he said, which had helped the real economies of all eurozone countries.
Referring to the effectiveness of central bank action when interest rates are close to zero, Draghi said: "I do not think that we are materially challenged in our ability to deliver our objective of price stability by the low level of interest rates."
READY TO TACKLE NEGATIVE DEPOSIT RATE
The ECB held interest rates unchanged at a record low 0.5 percent in June, but said it had discussed a raft of options it could deploy should the economy need more stimulus.
Draghi said on Tuesday the eurozone economy was still in a phase of adjustment, with recent survey data suggesting some improvement, but from low levels. He also referred to a rise in German wages and stronger exports to the rest of the world.
"These are data which seem to hint at a rebalancing of the situation. The role that exports will play in the oncoming recovery, which we expect by year-end this year, is important," Draghi said.
The president reiterated that the ECB would "monitor very closely all incoming information on economic and monetary developments and stand ready to act if necessary".
The unconventional options the Governing Council discussed in June included very long-term loans to banks, measures to fire up the market for asset-backed securities to boost lending to smaller companies and tweaks to its collateral framework.
But it concluded that economic conditions did not warrant such moves, or making banks pay to park their money with the ECB overnight by taking the deposit rate into negative territory, or cutting its main interest rate further.
Lowering the deposit rate below zero could encourage banks to lend money to the real economy rather than hold it at the ECB, though it could also have a big impact on banks' own operations and major implications for funding and bond markets.
Such possible unintended consequences did not mean the measure should not be used, Draghi said on Tuesday.
"We will continue reflecting on all these measures and we are ready to tackle (them) with all the unintended consequences they may entail," he said.
© 2023 Thomson/Reuters. All rights reserved.