Draghi strikes downbeat note as ECB extends policy rate hold

The European Central Bank’s governing council extended the duration of its current accommodative monetary policy by at least six months at its monetary policy meeting today (June 6).

ECB president Mario Draghi announced that the bank would keep policy rates at their current level “at least through the first half of 2020”. This comes after several monetary policy meetings where the ECB pledged to maintain current monetary policy at least until the end of 2019.

Draghi also underlined that the ECB would again increase its use of unconventional monetary policy tools if it felt this was necessary. He gave some of the most pessimistic remarks he has made in some time. In particular, Draghi said he was concerned by the weakness of the eurozone’s manufacturing sector and by the possible effects of major geopolitical strife.

The ECB president said the governing council had discussed cutting policy rates or restarting some quantitative easing programmes. His remarks were in stark contrast to the content of some of his monetary policy announcements in 2018, when he spoke about the timing for renormalising the ECB’s monetary policy. The ECB held its main refinancing rate at 0.0%, its marginal lending rate at 0.25% and its deposit facility rate at –0.4%.

The ECB’s staff forecasts for eurozone growth in 2019 were higher by 0.1 of a percentage point than previously, at 1.2%. But their estimates for 2020 were down by 0.2 of a percentage point, at 1.4%.

Draghi said the eurozone’s manufacturing sector was exhibiting consistent weakness. He said one key question was whether that weakness would spread to other parts of the eurozone economy.

The manufacturing sector was being held back in part because of considerable global uncertainty over trade, Draghi said. In response to a question about trade tensions between the US and China, the ECB president said markets were possibly concerned about other types of geopolitical tension beyond trade wars.

Draghi calls for toughness on AML

Draghi was speaking in Lithuania, where the governing council held its latest monetary policy meeting. Local regulators in Lithuania and neighbouring Baltic countries have been involved in several high-profile controversies over alleged large-scale money laundering.

Asked about the AML scandals in his press conference, Draghi gave his strongest remarks yet on European Union policy on anti-money laundering, saying its current regulatory regime was not strong enough and calling for radical change.

The EU had decided to give “soft power” to the European Banking Authority to oversee other agencies’ regulation of AML efforts, Draghi noted. But he said that it should instead create a new pan-European agency with stronger powers, he argued.