Euro falls sharply as ECB's Draghi clears path for more stimulus - CNBC

European Central Bank President Mario Draghi arrives for the European Council Summit in Brussels, Belgium, on March 22, 2019.

JULIEN WARNAND | AFP | Getty Images

European Central Bank (ECB) President Mario Draghi defended the tools that the organization has available on Tuesday, saying that it could cut interest rates again or provide further asset purchases if inflation doesn't reach its target.

Speaking at the ECB Forum in Sintra, Portugal, Draghi gave a defiantly dovish tone, saying that if the economic situation deteriorates in the coming months the bank would announce further stimulus. The euro dropped 0.2% against the dollar in a matter of minutes as Draghi delivered the remarks.

"In the absence of improvement, such that the sustained return of inflation to our aim is threatened, additional stimulus will be required," Draghi stated.

The ECB foresees "lingering softness" in the short term, in particular due to geopolitical factors and trade conflicts, which have weighed on exports and on the manufacturing sector — two important drivers of economic growth in the euro zone.

Earlier this month, the ECB revised its interest rate expectations, adding that its first-post crisis rate hike is unlikely to come before mid-2020. This dovish stance shows the central bank is doubtful about economic recovery in the 19-member region.

The ECB also presented new economic forecasts earlier this month, with lower growth and inflation projections for 2020, but marginally higher for this year.

During his speech in Sintra, Draghi also tried to reassure market players about the bank's ability to act amid growing doubts on the real effect of monetary policy if a new recession were to materialize.

"The (European) Treaty requires that our actions are both necessary and proportionate to fulfil our mandate and achieve our objective, which implies that the limits we establish on our tools are specific to the contingencies we face. If the crisis has shown anything, it is that we will use all the flexibility within our mandate to fulfil our mandate — and we will do so again to answer any challenges to price stability in the future," Draghi told the audience.

At the same conference, which began Monday, different policymakers and ECB-watchers raised concerns about the bank's toolkit. "I am nearly sure that the ECB cannot by itself, at this point, fight a recession ... It will need help, it is fairly obvious," Olivier Blanchard, former chief economist at the International Monetary Fund told CNBC's Annette Weisbach in Sintra.

He explained that the question is not so much the lack of available tools, but more their actual impact on the economy.

Nonetheless, Draghi stated Tuesday the different options that the ECB has available:

"We remain able to enhance our forward guidance by adjusting its bias and its conditionality to account for variations in the adjustment path of inflation. This applies to all instruments of our monetary policy stance," he said.

"Further cuts in policy interest rates and mitigating measures to contain any side effects remain part of our tools. And the APP (asset purchase program) still has considerable headroom," he added.

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