Mario Draghi’s real message is the focus on growth

By Antonia Oprita

Mario Draghi did it again. The European Central Bank President announced a raft of measures to ease monetary policy, initially greeted with cheers by the markets.

Some of the measures, at a closer look, weren’t all that great. For one, the cuts in the central bank’s policy rates were smaller than many had expected.

Richard Barwell of RBS calls the 10 basis points cut in the refi rate, the deposit rate taken to a negative 0.10% and the 35 basis points cut in the marginal lending facility to 0.4% “baby” rate cuts.

“Much will be made of the historic nature of negative rates, but in the cold light of day the Council just cut rates by a little less than half the normal amount,” he said in a note immediately after the ECB’s news conference.

Looking at the euro, it seems that this opinion is shared by many in the markets. After weakening by as much as 0.8% to the dollar following the ECB’s rate cuts and Draghi’s press conference, the single European currency is now back up again, 0.2% stronger on the day.

But eurozone bond yields – where the curve has steepened – and eurozone stock markets – with Germany’s DAX index closing at 9947.83 – show that investors are beginning to get Draghi’s real message.

And that message is pretty simple, although it may not please the diehard inflation fighters: the ECB has more than one needle in its compass.

At the beginning of the eurozone debt crisis, when Jean-Claude Trichet was president of the ECB, he insisted that the central bank looks at inflation only, with price stability the only needle in its compass.

For a while, Draghi sang the same tune. Price stability was the central bank’s only mandate, and that was that.

But for a long time he has been orchestrating a gradual and subtle change, and in the news conference on June 5 he made it very clear that the ECB has added growth to its agenda.


The word “growth” cropped up several times in his news conference, and it was mostly closely linked to that of the central bank’s mandate.

When asked whether he was bothered by the euro’s strength, he answered: “the exchange rate is not a policy target but it’s very important for price stability and growth.”

Normally, if the ECB’s mandate was price stability only, he should have stopped there, without feeling the need to add growth. This is a strong signal that the ECB’s mandate is now dual, closer to that of the Federal Reserve and the Bank of England.

The latter, although nominally embracing an inflation-targeting regime, made it pretty clear when it did not act as inflation rose to above 4% that it cares at least equally about growth.

Asked about eurozone governments’ fiscal austerity programmes, Draghi said: “the message that the ECB has sent has always been, you have to consolidate your budget but in a growth-friendly way.”

He also said about the package of measures announced by the ECB on June 5 that it was “meant to promote growth.”

But perhaps the strongest signal that the dual mandate is now a reality was his response to a question about the plight of savers, especially in Germany, because of the fall in interest rates: “interest rates will go up when growth will come back.”

In other words, dear Germans, go out and spend to kick-start that stalled growth already. And if the ECB measures aren’t enough to persuade you, here’s another “whatever it takes”-type quote for you from Mario Draghi:

“We think it’s a significant package. Are we finished? The answer is no. Within our mandate, we aren’t finished here.”

You have been warned.


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