Hopes for rate cut dealt blow by hawk Draghi
MORE monetary easing is firmly off the agenda as European Central Bank (ECB) boss Mario Draghi yesterday said he sets policy for the whole Eurozone – including countries with strong growth and low unemployment – not just those which are struggling.
The euro rose 0.21 per cent against the yen and moved off a two-week low against the dollar on the surprisingly hawkish announcement, while the ECB held the base interest rate at one per cent.
The ECB now believes inflation will stay above its two per cent target for the whole of 2012, before falling closer to target next year – again reducing the room for any further interest rate cuts.
Draghi congratulated the Italian and Spanish governments for their “significant efforts” in pushing through spending cuts and market reforms “in a very short space of time.”
However, he said other governments needed to step up their efforts, while all states should try to focus spending cuts on current, rather than capital, spending and minimising tax rises.
“It is understandable that under extreme urgency, governments take the easiest road, raising taxes and reducing capital expenditure,” he said.
“It is more difficult and complex to reduce current expenditure, but in the medium term this should be corrected.”
The ECB’s Draghi also yesterday stressed the continued need for market reforms, arguing that fostering private sector growth and entrepreneurship represents the best way to create jobs and sustainable economic growth in the medium term.
“There is no contradiction between growth and the fiscal compact,” he said.
“Growth is sustainable if it is based on several pillars, one of which is fiscal stability, Draghi added.