19 Jan 2017

Draghi goes for dull to calm excitement over reflation

Philip Shaw

Chief Economist

The ECB’s Governing Council (GC) opted to hold policy steady at its meeting today with the main refinancing rate held at zero, the deposit rate at -0.40% and the marginal lending rate at +0.25%.

As announced in December, the ECB will also continue with its €80bn per month of asset purchases until March and then at a €60bn per month pace from April. All of the above were in line with our own view and market expectations.

The ECB released some further technical details on the December announcement that the ECB can now, where necessary, make QE purchases at levels below the deposit rate. Here the ECB confirmed it will only allow purchases below the -0.40% rate to take place on the public sector purchase programme and not on other bits of its QE (like the asset back securities or corporate sector purchase programmes). Mr Draghi also stated that the ECB had not yet discussed whether the step down to a €60bn per month monthly purchase pace in April would be applied with cuts equally across the QE programmes.

Aside from such technical details on QE, there was little by way of new news and insights from the ECB today. Much of the discussion focused on the step up in Euro area inflation to 1.1% in December from 0.6% in November, the highest reading since September 2013. Although President Draghi described this move as marked, he appeared relatively relaxed about it and the appropriateness of the ECB’s policy stance. Fielding several questions on the move up in inflation, including particular interest from the German press (where inflation has reached 1.7%), Mr Draghi explained that:

  • He saw no sign yet of a convincing trend up in underlying inflation, saying the marked move up was driven by strong increases in energy prices and base effects.

  • As long as such effects remained transient they could be ‘looked through’, particularly given that he remained relaxed about subdued nominal wage growth.

  • The ECB would of course continue to monitor ‘second round effects’ (i.e. higher ways pushing prices up further), but this was not raised with any air of panic and laid out in the context of this being part of the GC’s routine work.

President Draghi’s relaxed stance on the inflation outlook helped the Euro edge lower still (after relatively robust 1.30pm US economic releases), reaching a low of $1.0590 against the USD part way through the press conference (currently $1.0607). The Euro’s move down was also helped by the ECB President’s statement that ‘tapering’ was not discussed and that the GC did not debate what he called ‘high class problems’ i.e. the ECB needing to reduce stimulus more quickly due to a faster pace of economic recovery than anticipated. President Draghi also noted that the change to allow QE purchases to be made below the deposit rate had ‘greatly enlarged the universe’ of eligible bonds for purchase, again assisting the Euro’s leg down by reinforcing the punch ECB QE could provide.

Finally, note that any attempts by the attending media to invoke an interesting response from Draghi on recent commentary by Donald Trump on the Euro or on British PM Theresa May’s Brexit strategy failed. And on the risk of currency wars, predictably, President Draghi stuck to the G7/G20 script, reminding listeners of the strong consensus to ‘refrain from competitive devaluations’.