Mario Draghi’s remarks at a European Central Bank (ECB) forum three weeks ago in Portugal caused a lot of confusion in the market. He sounded more confident about Eurozone’s economic recovery and suggested that the risk of deflation has passed. This has raised expectations of a change in the monetary policy later in the year. Bonds responded by staging a mini-tantrum, with German yields rising from 0.25% to 0.60%.
It was no surprise that Draghi’s speech on Thursday was also followed closely. Interest rate increases are still unthinkable at this stage and most economists do not expect them before 2019. The main debate centres around tapering of bond purchases and when it might be introduced.
But the ECB President is known for his silver tongue and ability to talk and not say much. His assessment of the economic outlook was very similar to the one he offered in June. He was also keen to emphasise that his earlier comments on inflationary forces were over interpreted.
Draghi said “While the ongoing economic expansion provides confidence that inflation will gradually glide toward levels in line with the inflation aim, it has yet to translate into stronger inflation dynamics,”. He then went on to say “A very substantial degree of monetary accommodation is still needed for underlying inflation pressures to gradually build up.”
The Governing Council did not set a precise date for discussing changes in its policy in the future, but rather deferred the decision about Quantitative Easing (QE) tapering to the “autumn”. Some central bank watchers jokingly commented that even that time frame could be ambiguous, given that this year, the astronomical start of autumn is 23 September, while the meteorological start of autumn is 01 September. The implication being that the next ECB’s meeting on 07 September might not even be “live”.
Market participants interpreted Draghi’s speech differently – yields fell, but Euro appreciated, most likely because currency strength was not explicitly highlighted as a concern.
Draghi’s next important appearance will be in Jackson Hole at the 2017 Economic Symposium, which will take place on 24-26 August. The last time he spoke there, in 2014, he made a last minute change to his speech that effectively signalled the start of QE (and the former US Federal Reserve Bank’s Chairman Ben Bernanke did the very same thing in 2012).
The clock is ticking – the current program of 60 billion euros a month of bond purchases is due to end in December. The ECB has many reasons to scale down its exceptional monetary stimulus – economic confidence is up, growth has been accelerating, spending and investment are on the rise as well. Instead, the ECB chose not to (at least for now) opening the way for a quiet summer holiday season.