ECB rate cut signals Draghi’s new focus on growth

By Andrew McCathie ,dpa

Frankfurt — Mario Draghi’s decision on Thursday to cut interest rates for the 17-member eurozone bloc two days after becoming European Central Bank chief signals his willingness to shift the bank’s focus from fighting inflation to spurring growth. The ECB surprised analysts by announcing a 25-basis-point rate cut at a time when inflation is at 3 percent, higher than the 2 percent limit set by the central bank. “It is crucial that fiscal consolidation and structural reforms go hand in hand to strengthen confidence, growth prospects and job creation,” Draghi said. The rate cut move indicated that Draghi would not hesitate to move away from the ECB’s mandate of fighting inflation and adopt a fiscal policy focused on spurring growth. “Listening to Draghi’s choice of words we get the impression that he might be slightly closer to having a US Federal Reserve policy target … i.e. putting more weight on growth,” said Danske Bank analyst Anders Moller Lumholtz. At a press conference in Frankfurt after the rate cut decision, Draghi also said that the bank’s controversial program of buying bonds of debt-burdened eurozone states like Greece was temporary and limited. “What makes you think that becoming the lender of last resort for governments is what you need to keep the euro region together?” Draghi asked at the press conference. “That is not really in the remit of the ECB. The remit of the ECB is maintaining price stability in the medium term,” he said. He added that it was up to debt-ridden eurozone states to implement the right economic policies to help lower their borrowing costs in sovereign debt markets rather than relying intervention by the ECB. The ECB is under pressure to continue the program to prevent Greece from defaulting on its debt, which could lead to it being ejected from the eurozone as the only way to save the euro.

Draghi said his assessment was that the eurozone was heading toward “a mild recession”. Analysts interpreted this assessment as a sign that more rate cuts will follow. “But Draghi’s style was perhaps a little more direct than Trichet’s,” said Jennifer McKeown, European economist with the research group Capital Economics. “He addressed each question head on and in a succinct manner, suggesting that he should give a clear steer on the ECB�s thinking in future,” she said.