We will not hesitate to act: Draghi

The euro zone will need “a strong effort” from all its policymakers if it is to overcome the “significant challenges” that global markets have thrown down over the past few weeks, the head of the European Central Bank has told the region’s lawmakers Monday.

In pre-released remarks, European Central Bank (ECB) President Mario Draghi told the European Parliament on Monday that to make “the euro area more resilient, contributions from all policy areas are needed.”

“The ECB is ready to do its part,” Draghi said.

Hints of more easing from Draghi on Monday pushed the euro lower. As Draghi started his speech, the single currency was trading down around 0.9 percent at about 1.1148 to the U.S. dollar.

The European stock markets, however, were trading higher, with the German DAX up 2.7 percent and French CAC both up nearly 3.14 percent and the FTSE 100 up 2.3 percent.

At the bank’s last monetary policy meeting in January, Draghi announced that the Governing Council would review and possibly reconsider its stimulus program in early March.

“The focus of our deliberations will be twofold, ” Draghi told lawmakers Monday.

“First, we will examine the strength of the pass-through of low imported inflation to domestic wage and price formation and to inflation expectations. This will depend on the size and the persistence of the fall in oil and commodity prices and the incidence of second-round effects on domestic wages and prices.

“Second, in the light of the recent financial turmoil, we will analyze the state of transmission of our monetary impulses by the financial system and in particular by banks.

“If either of these two factors entail downward risks to price stability, we will not hesitate to act.”

A large part of the European markets’ roller-caster ride has been down to fears about the stability of the region’s banks, the level of bad loans they have on their books and their ability to ride out further shocks.

However, Draghi taold European lawmakers that the state of Europe’s lenders at the moment is very different from the global financial crisis of 2007-2008.

“Banks have built higher and better-quality capital buffers, have reduced leverage and improved their funding profiles,” the ECB President said.

“Moreover, the Basel Committee on Banking Supervision noted that substantial progress has been made towards finalising post-crisis reforms and that the remaining elements of the regulatory reform agenda for global banks are being finalised.

“The clarification of these elements will provide regulatory certainty on the stability of the future framework. This will support the banking sector’s ability to make long-term sustainable business plans into the future.”

Since the ECB policy-setting meeting, economic data has been mixed, creating uncertainty as to the ECB’S next move — and giving particular importance to Draghi’s words on Monday.

Euro zone economic growth slowed to a four-month low in January, according to Markit’s composite purchasing managers’ index (PMI). Expansion slowed in both manufacturing and the services sector, with growth easing in Germany and Italy and the French economy remaining close to static.

However, the labor market in the euro zone has shown signs of strength. Seasonally adjusted unemployment in the area averaged 10.4 percent in December — the lowest rate recorded since September 2011 and the second consecutive monthly decline.

“This (may) make the battleground a little more rough for the president against his German colleagues, if he still desires to spur more QE (quantitative easing),” Naeem Aslam, chief market analyst at AvaTrade, said in a note this month.

One colleague in question may be Wolfgang Schaeuble, the German finance minister. Although he does not sit on the ECB’s decision-making board, the 73-year-old veteran politician is a vocal critic of loose monetary policy, which can include low interest rates and asset-purchasing programs.

Currently, the ECB’s main interest rate stands at 0.05 percent and there is a negative rate of minus 0.3 percent on its deposit facility. It makes net monthly asset purchases of 60 billion euros ($67 billion) and this will continue until March 2017 at the earliest, after a six month extension was announced in December.

German media, cited by Reuters, reported on Friday that Schaeuble planned to call for a turnaround in expansionary monetary policy internationally at the G-20 meeting later this month in Shanghai. He is reportedly concerned about the threat of creating new bubbles in financial markets.

However, Benoit Cœure, a member of the ECB’s executive board, failed to rule out the bank becoming even more expansionary at its next meeting, in an interview with Rheinische Post.

“This depends a lot on global developments. If necessary, we stand ready to use all of the instruments at our disposal. That includes the key interest rates and the size, composition and duration of our securities purchases. We will take a decision on this in March,” he said in an interview published on Saturday.

Katy Barnato | @KatyBarnato
CNBC
February 16, 2016