Mario Draghi is now sure to perform his eight years as the bank’s president without ever having raised interest rates. He commenced his term by revoking the rises put in by his predecessor Jean-Claude Trichet. He will finish it in November with rates continuing at their present record lows, which the ECB now pledges to continue in store until the conclusion of 2019 at the earliest. That is not the only dovish shift in Frankfurt. The ECB also reconfirmed it would maintain the number of financial securities it had built up as part of its quantitative easing programme until well after interest rates rise — which, given the interest rate announcement, amounts to a postponement for when “quantitative tightening” will begin. It further guaranteed a fresh round of competitive long-term loans to banks prepared to extend lending. This had been foreseen, not least because an early round of loans are about to mature and the central bank would prefer to sidestep a sudden reduction in liquidity. This is all prudent.
The Eurozone economy has moderated in the past six months and is susceptible to continued lethargy. It is notable that Mr Draghi said the risks had moved to the downside and that the policy choices were reached collectively. Seen in a deeper context, however, it is striking how difficult central bankers have found it to bring about the “normalisation” they have been craving. Depending on how you calculate, the past eight years have witnessed three or four aborted tightening turns by the world’s two biggest central banks. In 2011 the interest rate raises helped deliver the Eurozone into a second, self-inflicted recession.
Then in 2015, the US Federal Reserve hiked its policy rate by a quarter-point. Since late 2018, the Fed has again had to temper its tightening plan, vowing flexibility both on lifting rates and diminishing its balance sheet. And this does not include similar situations at smaller central banks. All these judgments, like the ECB’s today, have been judicious. In the vernacular, they have been “data dependent”: central banks have reacted to shifts for the worse in either markets or the actual economy or both. Although taken simultaneously, they present something vaster and more disturbing. Why do central banks find it so painful to eliminate monetary stimulus?
Principally because the economy has turned out, time and again, to be feebler than they hoped. Each time, central bankers have had to amend their mistakes. And while that is welcome, it does not excuse making the underestimates in the first place let alone when it has taken place over and over anew. One wishes that the monetary rethink on both sides of the Atlantic will further curtail the deceleration in Europe and limit one in the US. Yet if growth stabilises at a satisfactory pace, one must still hope central bankers have made enough mistakes to understand that they ought to be less reckless in any future tightening.