Dovish Draghi

July 3, 2014

In a dovish statement and press conference, ECB President Draghi asserted that the “combination of monetary policy measures decided last month has already led to a further easing of the monetary policy stance. The monetary operations to take place over the coming months will add to this accommodation and will support bank lending. As our measures work their way through to the economy, they will contribute to a return of inflation rates to levels closer to 2%.”  He went on to promise that “the key ECB interest rates will remain at present levels for an extended period of time in view of the current outlook for inflation. Moreover, the Governing Council is unanimous in its commitment to also using unconventional instruments within its mandate, should it become necessary to further address risks of too prolonged a period of low inflation. We are strongly determined to safeguard the firm anchoring of inflation expectations over the medium to long term.”

No fresh measures were unveiled.  Indeed, Draghi implied that changing policy at every meeting would be ill-advised, confusing to expectations and distorting to efforts to gauge the impact of prior changes.  The refinancing rate stays at 0.15% and is flanked by a 0.40% marginal lending rate and a negative 0.1% deposit rate.  Targeted LTROs to enhance the functionality of policy transmission are in the works as announced last month, and plans are underway to purchase ABSs. 

The macroeconomic scene faced by the euro area is the same.  Moderate recovery, low inflation, and subdued money and credit growth are projected.  So far, expected inflation remains consistent with target.  Growth risks are skewed to the downside.  Price risks are balanced.  A danger exists that inflation expectations will not remain firmly anchored if current very low inflation isn’t countered.

The biggest news of the press conference was the revelation that long-standing resistance to the release of meeting minutes will be dropped beginning with the first meeting of 2015.  Meetings from then onward will be held at six-week intervals, rather than the first Thursday of every month, regular reserve maintenance periods also are being extended to six weeks.  Like the Fed, the ECB will hold eight meetings per year, but the timing of those decisions is not being synchronized.

Copyright 2014, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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