Draghi and the ECB have come under fire recently, particularly from Germany, over their interest rate policy. The ECB president retorted to the claims by saying “our monetary policy is stimulating the economy by steering market rates below their long term levels." (Source: Ruptly TV, 5/2/2016)
Here's an excerpt from Mario Draghi's speech transcript:
The short-term perspective
Where does monetary policy enter the picture?
While structural factors drive long-term real rates, monetary policy influences interest rates over the short-term. But it does so only at the margin: central banks steer market rates relative to the level dictated by those structural forces. This alters the relative attractiveness of saving versus spending, and in doing so helps keep output around potential and ensures price stability.
Today, faced with a persistent output gap and too-low inflation, our monetary policy is stimulating the economy by steering market rates below their long-term levels. And since those long-term rates have fallen very low, it is inevitable that market rates have fallen to very low and even negative levels for an extended period of time to achieve the right level of demand support.
This has been the case not just for the euro area, but also for Japan, where central bank policy rates have been near zero since the mid-90s; for the US, where they have stayed near zero since 2008 and have been raised only once since, at the end of last year; and for the UK, where policy rates have been just above zero for 7 years now.
If central banks did not do this – i.e. if we kept interest rates too high relative to their real levels – investing would be unattractive, because the cost of borrowing would exceed the return. So the economy would stay stuck in recession. Conversely, by holding market rates below the real rate of return, we encourage the investment and consumption that is needed to bring the economy back to potential. That in turn creates the conditions for monetary policy to eventually normalise.
It might seem at first glance that this policy is tantamount to penalising savers in favour of borrowers. But in the medium-term, expansionary policy is actually very much to the benefit of savers.
For a start, savers can still earn satisfactory rates of return from diversifying their assets, even when interest rates on deposit and savings accounts are very low. For example, US households allocate about a third of their financial assets to equities, whereas the equivalent figure for French and Italian households is about one fifth, and for German households only one tenth. By contrast, German households keep almost 40% of their assets in cash and deposits, and French and Italian households approximately 30%. The equivalent number is less than 15% for US households.
But more fundamentally, it is key to appreciate that whatever financial assets savers hold, they always own a claim on the output of the economy. So their interest is ultimately the same as that of the economy as a whole.
If central banks did not act to bring the economy out of slump, what would happen to those claims? Not only would output rise more slowly towards potential, but more importantly potential itself would be eroded. Since unemployment would remain high for longer, people would lose their skills; and as investment would remain subdued for longer, the productive capacity of the economy would suffer lasting damage. A crisis-induced loss of output would then become permanent, and the real wealth of savers would inevitably be lower.
In other words, while low interest rates might appear to create a conflict between creditors and debtors, this is not true in the aggregate, and it is certainly not true over the medium-term. Overall, savers and borrowers in fact have the same interest: that the economy returns to potential without undue delay and grows sufficiently strongly to generate enough income for both. That, in final analysis, is the only way to truly protect the long-term interest of savers.
Thus the second part of the answer to raising rates of return is clear: continued expansionary policies until excess slack in the economy has been reduced and inflation dynamics are sustainably consistent again with price stability. There is simply no alternative to this today.
The only potential margin for manoeuvre is in the composition of the policy mix, that is, the balance of monetary and fiscal policy. In fact, those advocating a lesser role for monetary policy or a shorter period of monetary expansion necessarily imply a larger role for fiscal policy to raise demand and close the output gap faster.