Mario Draghi is in something of a pickle. The expectations he has raised for lower interest rates, more asset purchases, and reassurances on never-ending stimulus are making it difficult for the President of the European Central Bank (ECB) to follow through on them at this week’s policy meeting of the ECB governing council.
Bond prices have already risen in anticipation of central bank purchases, pushing government bond yields into negative territory. Banks have stepped up their complaints about negative interest rates on deposits, so that even a 0.1 percentage point reduction in the current minus 0.4 percent faces resistance. More and more countries are considering tiered interest rates to exclude a certain amount of the deposits from a penalty rate.
And even Draghi has to consider how long he can tie the hands of his successor, Christine Lagarde, if forward guidance goes through the end of next year, although he will have been out of office for 14 months by then. Plus, there are more questions than ever as to whether any of these measures will boost growth as European Union countries teeter on the brink of recession, or will do anything to spur the inflation rate—the main reason Draghi wants to act.
So the interest-rate hawks have been dive-bombing the financial pages, warning that the ECB can’t use all its powder now when downside risks are mounting. German central bank president Jens Weidmann has opposed them, of course. He has consistently fought accommodation measures, whether ordinary interest rate cuts or extraordinary asset purchases.
There has been little love lost between him and Draghi and even less as Weidmann was passed over for the ECB presidency in favor of the more accommodating French choice. He came out last month against monetary easing and especially against bond purchases.
In the meantime, the heads of central banks in Austria, Estonia and the Netherlands have added their voices in opposition. French central bank governor François Villeroy de Galhau, who leans hawkish, questioned whether bond purchases should start up again when yields are so low. ECB executive board member Sabine Lautenschläger lobbied for a more incremental approach, rather than a bazooka.
Each of these policymakers gets at most only one vote on the governing council, which now comprises 25 members. Villeroy de Galhau, for instance, will not be voting this time in the ECB’s complicated rotation system. Nonetheless, the Nays start to add up, and may force Draghi to scale back his stimulus in order to leave the bank with a semblance of consensus.
The deposit rate might be reduced to minus 0.5 or minus 0.6% instead of the minus 0.8 percent hoped for by doves. But the ECB may call for tiered rates to ease the blow.
It’s unlikely Draghi will back down from renewed asset purchases altogether, but may set them at limited amounts or for a vague timeframe. The current expectation is €30 billion to €40 billion of government debt a month. He might not proceed with raising the cap on purchases from any one government, currently at 33%.
But why would you scale back if your worry is that the measures will have limited impact anyway? What good are half-measures, now or later, if full measures may not get the job done?
Draghi has proven immensely forceful and resourceful and he will certainly put his personal prestige on the line. He is getting flanking support from the Federal Reserve as the U.S. central bank moves inexorably toward its own rate cut next week.
He may not leave with as big a bang as originally expected, but it won’t be a whimper either.