May 14, 2015 7:55 pm

Draghi warns central banks against ‘blind’ risk-taking

By Claire Jones in Frankfurt

Mario Draghi, President of the European Central Bank, ECB addresses the media during a press conference following the meeting of the Governing Council in Frankfurt/Main, central Germany, on November 6, 2014. European Central Bank chief Mario Draghi dismissed media speculation of deep differences on the ECB's policy-setting governing council. AFP PHOTO / DANIEL ROLAND©AFP

Mario Draghi has warned central banks to beware of the risk that aggressive monetary easing, including mass bond buying, could lead to financial instability and worsen income inequality.

The European Central Bank president said the apparent success of policies such as the ECB’s landmark €1.1trn quantitative easing package should not “blind” policy makers to the potential consequences of their actions on risk-taking in financial markets and in exacerbating wealth disparities.
“Because the use of these new instruments can have different consequences than conventional monetary policy, in particular with respect to the distribution of wealth and the allocation of resources, it has become more important that those consequences are identified, weighed and where necessary mitigated,” Mr Draghi said at the International Monetary Fund.
Central banks around the world have faced criticism that their response to the financial crisis is stoking asset-price bubbles and increasing inequality.

However, this is the first time Mr Draghi has spoken in depth about some of the biggest concerns about aggressive action by the world’s central banks.

The ECB president defended the decision to launch QE and other easing measures unleashed over the past year and claimed there was little to suggest imbalances in the financial system had already emerged. He also noted that all monetary policies had effects on wealth distribution and inaction by the ECB would have incurred other costs.
Mr Draghi argued that while the impact of QE on asset prices and economic confidence had been substantial, what ultimately mattered was what happened to investment, consumption and inflation in the eurozone.

In an attempt to play down talk that the ECB could slow the pace of its €60bn per month asset purchase plan before the planned cut-off point of September 2016, Mr Draghi said: “To that effect, we will implement in full our purchase programme as announced and, in any case, until we see a sustained adjustment in the path of inflation.”

There was no inflation in the eurozone in the year to April 2015. The ECB targets a level of below but close to 2 per cent.

The commitment to QE follows weeks of volatility in the market for benchmark German bonds.

They suffered a dramatic sell-off amid speculation the ECB would taper its bond-buying following signs of economic improvement in the eurozone. Figures published earlier this week showed the region’s economy outpacing its US and UK rivals in the first quarter on the back of a spending spree fuelled by cheap energy prices and low inflation.

“After almost seven years of a debilitating sequence of crises, firms and households are very hesitant to take on economic risk,” said Mr Draghi. “For this reason quite some time is needed before we can declare success, and our monetary policy stimulus will stay in place as long as needed for its objective to be fully achieved on a truly sustained basis.”

The ECB president said policy makers had “to be mindful that too prolonged a period of very low real rates can have undesirable consequences in the context of ageing societies.”

In such societies, monetary easing may have the opposite effect from what central banks intended. “For pensioners, and for those saving ahead of retirement, low interest rates may not be an inducement to bring consumption forward,” the ECB president said. “They may on the contrary become an inducement to save more, to compensate for a slower rate of accumulation of pension assets.”

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