Draghi Draws Line Under ECB Rate Debate and Warns on Prices

Draghi Draws Line Under ECB Rate Debate and Warns on Prices

(Bloomberg) Mario Draghi sought to quash the idea that the European Central Bank will begin tightening policy sooner than planned, saying that inflation in the euro area isn’t strong enough for officials to start signaling such a shift.

“I do not see cause to deviate from the indications we have been consistently providing in the introductory statement to our press conferences,” the ECB President said in a speech in Frankfurt on Thursday. “We have not yet seen sufficient evidence to materially alter our assessment of the inflation outlook -- which remains conditional on a very substantial degree of monetary accommodation.”

Draghi’s message comes after weeks of diverging signals from policy makers on the strategy the central bank will follow to exit its unprecedented stimulus. With the region’s upturn gaining momentum, the threat of deflation off the table, and slower purchases in the ECB’s 2.28 billion-euro ($2.43 billion) quantitative-easing plan as of this month, some governors have been urging tweaks to central bank’s forward guidance.

The ECB president countered such demands saying that the current policy path -- which expects that interest rates will “remain at present or lower levels for an extended period of time, and well past the horizon” of asset purchases -- is still appropriate to make sure that growth and inflation are solid enough to withstand the end of stimulus.

“Before making any alterations to the components of our stance -- interest rates, asset purchases and forward guidance -- we still need to build sufficient confidence that inflation will indeed converge to our aim over a medium-term horizon, and will remain there even in less supportive monetary policy conditions,” Draghi said. “It is clear that continued support for demand remains key.”

The euro dropped to the lowest since mid-March after Draghi spoke. The common currency was 0.1 percent lower on the day trading at $ 1.0653 as of 10:38 Frankfurt time, after falling as low as $1.0629.

Investor expectations that the ECB could raise the cost of borrowing as early as January 2018 had increased after Draghi’s March 9 press conference. Governing Council members from Austria’s Ewald Nowotny to the Netherlands’ Klaas Knot and Italy’s Ignazio Visco, as well as Executive Board member Benoit Coeure, had voiced to different degrees openness to a change in sequencing.

The time is approaching to “not have the foot pressed down on the gas pedal, but to lift it slightly,” Bundesbank President Jens Weidmann said in interview with Die Zeit on Wednesday, adding that he would welcome if bond purchases had stopped one year from now.

Yet expectations of an earlier rate increase had fallen after a series of speeches by policy makers, including Executive Board member Peter Praet, reaffirmed the status quo. Speaking after Draghi on Thursday, the ECB’s chief economist reaffirmed the importance of sticking to the current policy plan to avoid the risk of reversing the success of its measures.

“This forward guidance implies a sequencing between the interest rate policy and the quantitative policy that can most efficiently internalize and exploit the intimate complementarities between these two key components of our current stance,” Praet said.

Ahmed Mamdouh

Ahmed Mamdouh, Co-Founder and Head of English Fundamental Analysis at FXComment.com, with 7 years of experience in the financial markets. Mamdouh holds a Master’s Degree in Economics from The American University in Cairo and a Bachelor Degree in Economics from The Faculty of Economics and Political Science, Cairo University.

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  • Tssh_Nguyen

    Draghi so difficult reslove problem with economics of EU. Especially UK leave EU. Near time EUR/USD too slow in trade. Range 1.0556 - 1.0700. We don't have chance to join anything.