PARIS (MNI) – European Central Bank President Mario Draghi
suggested on Thursday that while economic weakness may have had spread
to the entire Eurozone, the central bank did not have any new
non-standard policy measures in the pipeline to combat it.

“We didn’t discuss any other non-standard measures,” Draghi told a
press conference after the bank cut its refinancing rate by a quarter
point to 0.75%, the lowest level since the creation of the euro. “It is
not obvious” that non-standard measures can be effective in an area as
fragmented as the Eurozone, he said.

Instead, Draghi focused on the bank’s standard policy measures,
saying the rate cuts announced on Thursday were especially potent
because they included a drop in the deposit rate to zero and because
they were unanimously backed by the bank’s Governing Council.

“The decision was unanimous on all grounds, which by itself carries
a special strength,” Draghi said. With the deposit rate at zero, there
would also be expectations of further policy easing, he said. “This by
itself has a positive effect, a stimulus effect,” he said.

The ECB is hoping that the deposit rate cut will spur banks to
withdraw some of the roughly E800 billion they have parked in its
deposit facility and use the funds to make loans. But he acknowledged
that risk aversion, lack of capital and lack of adequate funding in some
countries were still preventing banks from stepping up their lending.

Draghi praised EU leaders for their decisions at last week’s summit
to move toward a banking union, but he disappointed markets by not
explicitly supporting the leaders’ decision to use Europe’s rescue funds
to stabilize sovereign bond markets, and by stressing the conditionality
of any financial support.

“There is nothing without conditionality,” Draghi said.
“Conditionality gives credibility.”

Yields on Italian and Spanish bonds rose sharply following Draghi’s
press conference, reversing a substantial part of declines posed
immediately after the summit.

In his economic outlook, Draghi made clear that the risks to growth
had increased since the bank’s last monetary policy meeting while the
inflation risks, as expected, were receding. Inflation would likely fall
to below 2% by 2013 – perhaps before, he said.

“We see now a weakening of growth in the whole of the euro area,
including the countries that had not experienced it before,” Drag said.
“We can genuinely say this [rate cut] is addressed to the whole of the
euro area.”

He added that the ECB was not running out of standard monetary
policy options to address the situation.

“There is no such feeling that we are running low on policy
options,” he said. “We still have all our artillery” to pursue price
stability “in both directions.”

–Paris newsroom, +331-4271-5540; jduffy@marketnews.com

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