ECB's Draghi Defends Interest Rate Guidance
European Central Bank (ECB) President Mario Draghi reiterated on Monday his commitment to low interest rates, saying higher rates were not currently warranted.
Speaking to the European Parliament's Economic and Monetary Affairs Committee, Draghi said: "The situation, as far as price stability is concerned, and the economic situation in large parts of the world is concerned, is that higher interest rates would not be warranted at this point in time."
He said the ECB had "sharpened its communication" in giving forward policy guidance for the first time last week, when Draghi said interest rates would remain at present or lower levels for an extended period of time. The announcement shocked markets and sent the euro falling against the dollar.
When asked whether the statement itself would suffice, or further policy action was needed, he said: "The intention was really to announce a monetary stance which will keep the interest rates to remain at the present or lower levels for an extended period of time. Then we'll have to see what the market reaction has been, is and will be to this statement."
On Monday, Draghi conceded that raising interest rates could produce some benefits. "Of course, higher interest rates would reduce risk on the one hand," he said, but added: "On the other hand, higher interest rates in a weak economic situation would destabilize a country, making the life of your counter-parties even more difficult."
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Draghi also said that the euro area continued to face considerable challenges.
"The economy is still weak. Financial fragmentation remains. This challenges the very concept of the single market," he said. "Euro area economic activity should stabilize and recover over the course of the year, although at a subdued pace."
The risks surrounding the economic outlook for the euro area continue to be to the downside, he said. He described Portugal as "just one of the examples where the economic situation remains stressed and social distress is indeed very high."
Political instability in the country rocked financial markets last week. The yield on Portuguese 10-year government bonds climbed above 8 percent on Wednesday, before falling back to below 7 percent, and stocks fell sharply after the resignation of Finance Minister Vitor Gaspar. He introduced harsh austerity measures required for bailout funds, which were deeply unpopular.
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"What the ECB has done is basically say, 'Look, don't unravel the progress that these countries, and Portugal especially, has made on fiscal consolidation. But make this fiscal consolidation growth-friendly. Lower your taxes, lower your current expenditures, make structural reforms,'" Draghi said. "We know that fiscal consolidation was, and still is, unavoidable."
Speaking in his capacity as chief of the European Systemic Risk Board, which was set up to strengthen supervision and rebuild trust in the financial system in the wake of the crisis, Draghi also said the process of repairing the financial system in Europe was making progress.
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