Mario Draghi hedges on ECB's stimulus options

WASHINGTON -- European Central Bank President Mario Draghi on Saturday acknowledged the challenges of using U.S.-style bond purchases to jolt the euro zone from weak growth and said officials may instead have to consider other measures.

Draghi, who spoke to reporters after the International Monetary Fund's annual spring meeting in Washington, D.C., gave no indication that the ECB is closer to deciding whether to launch a stimulus program to combat low inflation that threatens to slow the region's nascent emergence from recession.

Last week, he said ECB policymakers unanimously agreed that they were prepared to use "unconventional" tools, besides lowering interest rates. IMF officials have urged the ECB to take more aggressive action.

Low inflation can lead to deflation, or falling wages and prices, that prompts consumers to put off purchases, which slows growth and makes it tougher for governments, businesses and consumers to pay off debts. The area's inflation fell to an annual rate of 0.5% in March, well below the ECB's 2% target.

Draghi said Saturday, "We see no evidence that people are postponing their spending patterns." ECB officials, he said, expect growth to accelerate toward the 2% target later this year as food and energy prices pick up. He added that low inflation has its advantages, such as making products and services more affordable for consumers.

But acknowledging the perils of falling prices, he added, "We should not be complacent." He added that the ongoing appreciation of the euro ultimately may force the ECB to take stimulus action. A rising euro makes imports less expensive for consumers, exacerbating low inflation, and it hurts economic growth by making exports more expensive.

Many economists expect the ECB to purchase massive amounts of bonds to push down long-term interest rates, similar to the program the Federal Reserve undertook in the aftermath of the 2008 financial crisis and is now winding down. But Draghi conceded the size of the euro zone asset-backed bond market is limited to about $100 billion, noting that corporate borrowing in Europe is mostly done through banks.

"We may need to consider other unconventional measures," he said.

He was not more specific. But in an interview, IMF First Deputy Managing Director David Lipton said the ECB could buy assets directly from bank balance sheets, instead of in the bond market.

Another option is the ECB could push near-zero interest rates into negative territory, meaning banks would have to pay to park their money at the ECB, theoretically prodding them to lend the money instead.

Draghi downplayed the ability of monetary policy to address the region's 12% unemployment rate. "If you think monetary policy can fix all the problems in the world, you're wrong," he said.

Draghi also responded coolly to IMF officials' recommendation that advanced economies, such as the United States and eurozone, better coordinate monetary policy with emerging markets, such as India and Brazil.

Last year, foreign capital poured out of emerging markets when U.S. Fed officials began discussing plans to reduce its bond-buying program, which pushed up U.S. interest rates and made foreign assets less attractive.

Similarly, when the Fed and the ECB took steps to lower interest rates during the financial crisis, foreign investors rushed into the emerging markets, driving up their currency values and making their exports less attractive.

Draghi said, "We look at spillover" effects on emerging markets. "It's good to be aware of the impact of our action."

But he added, "It's very hard to coordinate" policy. "Each of us has our (own) mandate." Fed officials have voiced a similar view.

Separately, IMF Managing Director Christine Lagarde told reporters Saturday she was encouraged that the global recovery is strengthening, but she added: "It's uneven, it's too slow, it's too fragile."

In its communiqué, the IMF's International Monetary and Financial Committee called for steps including more infrastructure investment and labor market overhauls in some countries. The changes would increase productivity and expand the role of women and older workers, among other measures.

IMF officials also reiterated their disappointment in the failure of Congress to approve 2010 IMF reforms that would increase the voting power of emerging markets to reflect that their economies now make up two-thirds of global growth. The IMF said it would examine other options if Congress does not ratify the reforms by yearend.

As the changes -- which also would double the IMF's lending reserves -- languish, "We are much more likely to see more disruption," said Tharman Shanmugaratnam, chairman of the monetary and financial committee and deputy prime minister of Singapore. Nations, he said, will become more likely to form regional alliances instead of taking part in the IMF, a global group with 188 member countries.

"It's really a world that would be a less safe and less good place," he added.


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