Draghi Says Key Global Risk Is Sudden Jump in Interest Rates

(Bloomberg) -- European Central Bank President Mario Draghi said the key threat facing the global economy is a jump in interest rates sparked by financial instability, inflation surprises or geopolitics.

“It's quite clear that the main risk we should focus on here is a sharp repricing in assets, or a sharp increase, a sharp and sudden increase, in interest rates,” he told reporters in Bali as finance ministers and central bankers met at the International Monetary Fund's annual gathering.

With the IMF revising its global economic-growth outlook lower for the first time in more than two years as trade threats take their toll, concerns are mounting over the world's ability to cope with a gradual central-bank retreat from crisis-era support. International markets tumbled last week.

Referring to his conversations with delegates at the IMF meeting, Draghi said banks are “by and large” much stronger than they were in the past but that shadow banking needs closer monitoring, and that macroprudential tools need to be enhanced to safeguard financial stability.

The risk of faster-than-expected inflation was "one of the issues that was looked at, especially in the U.S.," he said, adding that the chance of a spike remains low in Europe.

The biggest geopolitical risk was seen as trade protectionism, and the “degree of concern” has worsened in the last six months. Draghi said the recent signing of a new free-trade pact between the U.S., Mexico and Canada was “positive” but it remains to be seen if the U.S.-China spat will escalate.

The ECB chief also cited attacks on central-bank independence as a geopolitical risk. Those comments come in the wake of a series of criticisms of the U.S. Federal Reserve by President Donald Trump, and Turkish President Recep Tayyip Erdogan's broadsides against rate hikes.

“Executives are asking the central banks to do things, which is not exactly the way to respect central-bank independence,” Draghi said. “They're asking to change the interest-rate constellation, to buy bonds and do other things.”

Draghi said the ECB itself is freer from political restraint after several court cases over its emergency bond-buying plan -- OMT -- and quantitative easing.

“The ECB basically won” the cases, he said. “The independence within the mandate of price stability -- not other mandates, not financing deficits of governments -- today the ECB is more equipped to cope with challenges than it was six, seven years ago.”

To contact the reporter on this story: Alessandro Speciale in Bali at aspeciale@bloomberg.net

To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Sarah McGregor

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