Mario Draghi must be feeling a lot like Father Christmas – only with an impossibly-long wish list from financial markets.
For the second year in a row, the president of the European Central Bank has signaled that he intends to deliver markets an early Christmas present – a promise to flood the economy with additional cheap money by bringing down interest rates in the 19 countries that use the euro currency.
It was in December of last year that Mr. Draghi pushed through a massive trillion-euro bond-buying program that involved buying up government debt on a grand scale. It marked the sort of bazooka of monetary policy – used by the Federal Reserve in the aftermath of the 2008 financial crisis – and was a first in the Frankfurt-based ECB’s 16-year history as the guardian of the euro-zone economy.
This year, as the central bank’s decision-making governing council prepares to meet on December 3, Mr. Draghi finds himself with little choice but to double down on last year’s promise: “We will do what we must to raise inflation as quickly as possible,” he said in a Frankfurt speech earlier this month.
That could mean firing another bazooka, either by expanding the pace of the European Central Bank’s bond-buying program, or by charging banks a higher rate to park their reserves with the central bank.
Only this time, there is growing frustration that the ECB and Mario Draghi are proving ineffective and out of fresh ideas. For some, the ECB is doing far too little and in danger of failing in its mission to keep inflation near 2 percent. For others, the central bank has already done far too much, its medicine acting like a drug that risks creating another financial market bubble in the process.
Financial markets, while demanding that Mr. Draghi do more, are increasingly doubtful that the European Central Bank will deliver on its promises. Nor do they believe the medicine being prescribed will really help raise consumer prices in the euro zone to the 2-percent level that is the ECB’s official target.
It’s a major dilemma for Mr. Draghi and his lieutenants, says Michael Krautzberger, head of European sovereign bonds at fund manager Blackrock.
“So far, Draghi has always very cleverly monitored the market, and met or even exceeded its expectations. But this is leading to a kind of vicious circle: The markets keep expecting more, placing the ECB under pressure to always do more. Only this time, it may disappoint the markets,” Mr. Krautzberger told Handelsblatt.
He is not the only one who worries that Mr. Draghi has been placed in a quandary. The ECB Shadow Council, an unofficial panel of top European economists convened by Handelsblatt about once every three months to debate the ECB’s policies, was fiercely divided during a conference call Friday over whether the central bank needs to double down or turn off the money spigot for now.