Draghi may copy Bernanke on path to low rates

European Central Bank President Mario Draghi may act more like Ben S. Bernanke than Jean-Claude Trichet in 2012.

With the euro area’s debt crisis pulling its economy into a second recession in three years, Draghi soon may cut the ECB’s benchmark interest rate below 1 per cent for the first time and help banks by further inflating its balance sheet, which already has ballooned 17 per cent since he took office November 1.

Such activism would mark a reversal from a year ago — when the Trichet-led ECB was pivoting toward higher rates — and is causing economists at Bank of America Corp. and Jefferies International Ltd. to declare that Draghi is behaving more like Federal Reserve Chairman Bernanke than his ECB predecessor. If the slump drags down Germany, Europe’s largest economy, and fans deflation, it may even prompt the bank to consider Fed-style asset buying, providing relief it now balks at for governments.

“There is a sizable difference in just two months between Trichet and Draghi,” said Laurence Boone, chief European economist at Bank of America Merrill Lynch in Paris. “If you put Bernanke at one end of a scale and Trichet at the other, then Draghi would be moving toward Bernanke.”

The likelihood of looser monetary policy leaves UBS AG forecasting the euro will record a third consecutive annual decline against the dollar. While the currency may enjoy occasional fillips on optimism that officials are stepping up their crisis-fighting, it will slide to $1.25 by the end of the year, predicts Beat Siegenthaler, a Zurich-based foreign- exchange strategist at UBS.