ECB rates becoming more effective again, says Draghi

The European Central Bank is ready to act to aid the eurozone economy if needed, while signs of market stabilisation mean interest rates are becoming a more effective tool again, ECB chief Mario Draghi said on Tuesday. Speaking in occupied Jerusalem at a farewell conference for Bank of Israel Governor Stanley Fischer, Draghi said there were numerous measures the ECB could and would deploy if needed, and that it was ready to tackle any unintended consequences.
"We have been able to regain better control of monetary conditions in the euro area economy, which is very important for providing the appropriate monetary policy impulse to the economy," Draghi said in a speech. The ECB president said the transmission of its monetary policy was on the mend, so that all corners of the eurozone could benefit from low interest rates, currently 0.5 percent.
His comments surprised some economists. "I am not sure I get what the ECB tries to convey with this," said Deutsche Bank senior European economist Gilles Moec. "It was vital to compress sovereign bond spreads and this has been achieved very efficiently by the ECB. But there is still no clear sign of impact ... on actual origination of credit to households and businesses."
The ECB has discussed options including cutting its deposit rate into negative territory at recent meetings but decided such moves were not justified despite tough lending conditions for households and companies in the eurozone's crisis-hit south. Data this month showed borrowing costs rose further in April for small businesses in Italy and Spain, while the amount banks in those countries lent to local firms declined. "Draghi's comments highlight that the ECB has not run out of ammunition and still has sufficient fire power to stimulate the economy if needed even though interest rates are close to zero," said Tobias Blattner, economist at Daiwa Capital Markets.
Draghi said the calming effect on markets of the ECB's bond-buying pledge last summer and economic reform had eased the emergency settings which have undermined the central bank's influence on borrowing costs for euro zone firms and households. Draghi said on Tuesday the eurozone economy was still in a phase of adjustment, with recent survey data suggesting some improvement, but from low levels. He also referred to a rise in German wages and stronger exports to the rest of the world.