LONDON (Reuters) - Assuming European Central Bank president Mario Draghi sees out his mandate, he will step down in October 2019. And financial markets reckon there’s a fair chance he will complete his eight-year tenure without ever having raised interest rates.
That would be remarkable. Even Ben Bernanke, the ultra-dovish former Federal Reserve Chairman who unleashed three QE programmes worth over $2 trillion in response to the 2008 crisis, raised rates. Not just once, but three times.
The ECB eased monetary policy on Thursday for the second time this year, extending its quantitative easing stimulus programme by six months and cutting its deposit rate further into negative territory.
But financial markets were unimpressed. Largely on the back of comments from Draghi himself in recent weeks, investors had discounted much more aggressive easing. The euro and bond yields soared, while stocks tumbled.
But moves in markets that look further ahead told a different story. Bets on inflation expectations five years hence pointed to a fall and money markets kept a first ECB rate hike pencilled in for mid-2019, just before Draghi exits the stage.
“Could Draghi never raise rates? Absolutely. It’s the most likely scenario,” said Lena Komileva, director at G+ Economics in London. “It’s very difficult to see how the ECB will achieve its inflation target within three years.”
Annual inflation across the 19-country currency bloc is currently 0.1 percent, a long way from the ECB’s target of below, but close to, 2 percent over the medium term.
The ECB on Thursday extended bond-buying under its QE programme by six months to March 2017, more than two years before Draghi is due to retire. But the Bank of England’s experience shows how difficult it can be to go from printing money to lifting interest rates from historical lows.
The BoE’s QE programme has been left at 375 billion pounds since July 2012 and interest rates have been anchored at 0.5 percent for almost seven years. Markets still don’t expect a rate hike until late 2016.
Draghi replaced Frenchman Jean-Claude Trichet in November 2011. The ECB under Trichet was the first big central bank to spot and respond to the credit crunch that would trigger the global crisis, injecting 95 billion euros (£68.6 billion) into the system on 9 August 2007.
But he was later criticized for raising rates in 2008 and 2011 to pre-empt what turned out to be a phantom threat of inflation, only to be forced to cut them again almost immediately as the euro zone economy sank into recession.
Draghi was in crisis-management mode right from the start as the euro zone sovereign debt crisis escalated rapidly. In July 2012, in unscripted remarks made in London, he pledged to do “whatever it takes” to save the euro.
Arguably, those three words did indeed save the euro project. Talk of the bloc breaking up dissipated, the euro recovered, and yields on government bonds of even the bloc’s most indebted members collapsed as financial markets took “Super Mario” at his word.
But shrinking inflation since the middle of last year thanks to the plunge in oil and commodity prices has forced the ECB to act to ensure the euro doesn’t slide into deflation.
The 1 trillion euro QE programme and negative interest rates are highly controversial and unconventional policies for the Frankfurt-based central bank, and have been driven by the Italian Draghi.
“Easing in both standard and non-standard policy has been what Draghi’s tenure has been about thus far, and that is expected to continue until the end of his term barring a significant turnaround in global growth,” said Patrick O’Donnell, a portfolio manager at Aberdeen Asset Management.
Reporting by Jamie McGeever and John Geddie; Editing by Catherine Evans