Mario Draghi has three months to cement his impressive legacy at the European Central Bank.
He is widely expected to preside over further easing in monetary policy before his departure. The only uncertainty is exactly when, and which precise parts of the crisis toolkit will be deployed again.
He should act soon, and he should use all tools at the ECB's disposal. Anything less risks shackling the eurozone economy to a further period of weak growth and low inflation.
Draghi's June speech at the ECB's annual symposium in Sintra marked a turning point.
His remark that "in the absence of improvement . . . additional stimulus will be required" significantly lowered the bar for easing. It also reversed the return to more conventional policy.
With inflation remaining well below target and the outlook for economic growth weak, the ECB has caught up with reality. And Europe is not alone in this recalibration of monetary policy.
The US Federal Reserve is widely expected to cut interest rates next week for the first time in almost a decade.
The case for looser monetary policy is clear despite likely future complaints from banks and savers, particularly in Germany. The German economy is projected to post its weakest annual growth in gross domestic product in six years, while Italy is stagnating. Domestic factors are playing a role but the bloc's export-orientated manufacturing sector is feeling the brunt of rising protectionism and the resulting slowdown in global trade.
An even bigger worry is inflation. Market-based measures of inflation expectations remain close to an all-time low, raising fears that below-target inflation could become entrenched. Headline inflation stands at just 1.3 per cent, while core inflation has been stuck around 1 per cent for the past six years.
ECB monetary policy is already extremely loose. But it is not at its limits. First, take quantitative easing. A seven-month hiatus on net asset purchases has created more headroom before the ECB hits self-imposed limits on the share of outstanding securities it can buy. Draghi also commented recently that these limits are flexible.
There is scope, too, for further reduction in ECB interest rates. The bank last cut interest rates in March 2016, taking the deposit rate to minus 0.4 per cent.
Draghi has downplayed complaints that negative rates are hurting bank profitability but the ECB is monitoring the need for "mitigating" measures.
An announcement of tiering, creating thresholds where deposits are subject to different rates, would reduce the amount eurozone banks pay the ECB for holding excess reserves. It is also a way for the ECB to signal the deposit rate can go much lower without losing its stimulative effect on demand.
A new round of cheap long-term loans was announced in March, while guidance on interest rates was extended in both March and June. The latest commitment is for borrowing costs to remain at current levels at least through the first half of 2020.
As eurozone conditions have failed to improve, the governing council should at a minimum update its guidance to make clear that interest rates can be lowered.
As the ECB's tools are "complementary and mutually reinforcing", a full package of measures is the best way to limit downside risks for the bloc's economy.
Draghi would also do well to lay the ground for his successor, Christine Lagarde. Putting in place a looser policy stance which includes a new bond-buying programme before his departure is the best way to do this. It would also give his successor a start free of immediate political obstacles. This would be a worthy last act.
Written by: The editorial board
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