Mario Draghi said the European Central Bank’s non-standard measures have proven effective, and low interest rates haven’t yet led to financial imbalances.

Unconventional actions “have proven so far to be potent, more so than many observers anticipated,” the ECB president said in a speech in Washington. “While a period of low interest rates will inevitably result in some local misallocation of resources, it does not follow that it has to threaten overall financial stability” and “there is little indication that generalized financial imbalances are emerging,” he said.

The ECB cut its benchmark interest rate to a record-low 0.05 percent in September and has relied on a range of non-standard stimulus to resuscitate the 19-nation economy. Policy makers have provided banks with loans designed to fuel credit supply and started buying government bonds in March, while urging governments to push ahead with structural reforms.

“Structural reforms that increase confidence in economic prospects and encourage entrepreneurs to capitalize on today’s extremely accommodative financing conditions will make our policy commensurately more powerful,” Draghi said in his speech on Thursday.

He said that such reforms are essential to ensure the ECB’s policies have their desired impact.

“It is ultimately only a combination of policies, that are complementary and mutually consistent, that will allow our policy to reap its full effects –- and to bring about a lasting return of both prosperity and stability for the whole euro area,” he said.

Draghi reiterated that the ECB is committed to implementing its 1.1 trillion-euro ($1.2 trillion) asset-purchase plan “in full,” and “in any case” until inflation has recovered lastingly.

“While we have already seen a substantial effect of our measures on asset prices and economic confidence, what ultimately matters is that we see an equivalent effect on investment, consumption and inflation,” he said.

David Fuller's view

Super Mario Draghi is the best thing that has happened to the EU since the 2008 financial crisis.  Moreover, having won his long battle to determine his own ECB monetary policy last year, he is becoming bolder in urging governments to implement structural changes.  The requirement for this is so obvious to anyone with a modicum of insight regarding what enables economies to prosper, but will any of the EU’s bureaucratic socialists pay attention?  I certainly hope so and there are quiet capitalists in the EU but socialism remains a form of religion for too many. 

Meanwhile, the mere announcement of Mario Draghi’s QE programme in January caused EU stock market indices to surge, even though the policy did not commence until March.  Those rallies spilled over into consolidations in mid-April and quite overextended conditions relative to the 200-day MAs have been mostly corrected.  Some upward dynamics have also occurred recently.  Therefore, some closes beneath the recent lows would not be required for further delay sideways to higher trading for these indices: Euro Stoxx 50 (weekly & daily), CAC (weekly & daily), DAX (weekly & daily), IBEX (weekly & daily), MIB (weekly & daily) AEX (weekly & daily), OMX (weekly & daily) and KFX (weekly & daily).  Note: Denmark has been the relative strength leader among this group but it is also the most overextended relative to its MA.

Here are Bloomberg’s P/Es & Yields for the indices above: SX5E 20.60 & 3.40%, CAC 25.88 & 2.93%, DAX 18.70 & 2.52%, IBEX 20.63 & 5.54%, MIB 72.81 & 2.43%, AEX 22.66 & 2.62%, OMX 16.20 & 3.57% and KFX 26.20 & 2.80%.