European Central Bank President Mario Draghi said the Governing Council enhanced its communication last week by giving an outlook on interest rates at a time when the euro-region economy remains weak.
“The Governing Council sharpened its communication by announcing that it expects the key ECB interest rates to remain at present or lower levels for an extended period of time,” Draghi told the European Parliament’s Economic and Monetary Affairs Committee in Brussels today. “This expectation was based on the overall subdued outlook for inflation extending into the medium term, given the broad-based weakness in the real economy and subdued monetary dynamics.”
The ECB and the Bank of England both indicated on July 4 that they will keep benchmark interest rates low for longer than investors were betting, breaking new ground to protect their economies from a U.S.-led surge in bond yields. Draghi’s outlook represented a change in policy for an institution whose officials had until then consistently said that it “never precommits” on monetary policy.
“The euro area still faces considerable challenges” and “the economy is still weak,” Draghi said today. Still, recent confidence indicators “have shown some further improvement” and economic activity “should stabilize and recover over the course of the year, although at a subdued pace.”
Draghi also said that the euro region faces an improved situation compared with a year earlier.
“Clearly financial conditions in the euro area today are more stable and resilient than they were last summer,” he said. “This is partly due to our determined monetary policy actions. Governments and parliaments have also played a key role in the relative return of confidence and stability by undertaking courageous reforms.”
In his opening statement to lawmakers, Draghi updated them on progress toward the creation of a program led by the European Investment Bank to stimulate lending to small and medium-sized companies, and on the ECB’s work to establish a banking supervisor.
“Reinstating beyond doubt the soundness of the banking system, reintegrating the banking system and delivering a supervisory framework that will prevent a repeat of the past risk buildup” are among the ECB’s objectives, he said. “All core elements should fall into place swiftly to reap the full benefits of a banking union”