By Balazs Koranyi and Francesco Canepa
SINTRA, Portugal (Reuters) – Mario Draghi is seeing out the final weeks of his tenure in charge of the European Central Bank, but his overt hint of more stimulus to come could mean his influence is felt on ECB policy long after he has left the bank’s Frankfurt home.
Draghi leaves office at the end of October but a fresh round of stimulus in whatever form would set the direction of travel for much of the next year, thus making it difficult for a new ECB president to chart a new course even if they wanted to.
Draghi said on Tuesday the ECB was prepared to cut rates or restart bond purchases in the absence of a clear improvement in the inflation outlook – complicated moves that are difficult to quickly undo without damaging the bank’s credibility.
Who will take over from Draghi is still part of a wider game of political musical chairs on the European level and subject to the usual horse-trading by national leaders.
With the succession still up in the air, Draghi had the leeway to act, ECB-watchers and policy-makers acknowledge.
Fresh stimulus would protect the Draghi legacy at least for some time if a hawk like Germany’s Jens Weidmann, the Bundesbank president, takes over the ECB.
It could also make life easier for a more centrist successor such France’s Francois Villeroy de Galhau or Finland’s Olli Rehn and Erkki Liikanen, because difficult decisions would then already be out of the way.
“He seems keen to protect his legacy and he wants to go out showing he’s done everything. He also wants to make it difficult to undo the ‘whatever it takes’ legacy,” one ECB policy-maker, who asked not to be named, told Reuters, referring to Draghi’s famous 2012 promise of unprecedented central bank support for the euro that brought the bloc back from the brink of collapse.
Germany’s political establishment, known for hawkishness on monetary policy, was predictably up in arms at Draghi’s speech, which even caught other ECB policy-makers by surprise.
“The apparently uncoordinated comments from ECB President Draghi on further monetary policy measures are an alarming signal for the European Central Bank’s integrity,” said Hans Michelbach, spokesman for Chancellor Angela Merkel’s conservative CDU/CSU bloc.
Draghi’s defenders are quick to point out that he himself charted a fresh course immediately after taking office, reversing erroneous rate hikes.
But Draghi has revamped the ECB’s policy framework, which would make a similar reversal now near impossible.
The key ECB rates are tied down by forward guidance, the bank’s communication mechanism which currently sees unchanged rates through the first half of 2020. A rate hike would thus risk invalidating the bank’s key tool to signal its future policy stance.
The ECB has also hinted that a rate cut might be accompanied by a multi-tier deposit rate to protect lenders from the side effects of negative rates. That is a complex facility which would be damaging to implement only to quickly end.
Quantitative easing — a purchase of sovereign and private debt — also needs time to be effective and the ECB has in the past signalled its planned duration, making this facility also difficult to quickly change.
While Draghi did not promise more stimulus, the wording and conditionality outlined makes it nearly impossible not to act.
“There is no question about the strength of the signal – the ECB stands ready to act using all the instruments at its disposal, with no limits within its mandate,” Pictet Strategist Frederic Ducrozet said.
“As close as it gets to pre-committing,” he added.
Precarious growth in Draghi’s native Italy may have also been a factor. With state finances already strained, Italy looks set to see a big increase in borrowing costs.
“If QE (quantitative easing) starts again, it could have the same impact as the last announcement in 2014. It will ease the situation in primary markets for us,” Davide Iacovoni, head of debt management at the Italian Treasury said.
(Additional reporting by Michael Nienaber, Christian Kraemer and Abhinav Ramnarayan; editing by Mark John)