Draghi Sells a Lemon, and the Market Buys It

(Bloomberg Opinion) -- European Central Bank President Mario Draghi is not panicking — yet — about slowing European growth. The euro has taken solace from that, despite the central bank’s key admission that risks for the economic outlook have moved to the downside.

Thursday’s rate decision and press conference started out badly for the common currency. The shift in thinking drove it down precipitously. Then, Draghi flexed his communication skills, and as he highlighted global risks such as Brexit, a slowdown in China and global protectionism, he was also swift to emphasize that these were being met with strong responses from governments. The euro rather liked that.

Draghi Sells a Lemon, and the Market Buys It

Filling out the plus column for the euro area were repeated mentions of rising and widening wage growth, lower oil prices and stronger bank balance sheets.

The prospect of further targeted long-term refinancing operations (TLTROs) — cheap liquidity for banks — were raised by several members of the governing council, but a decision was not discussed. But without doubt it will be at the March meeting. Though the view of the ECB overall is that chances of recession are low, Draghi noted some differing opinions on the governing council, giving him wiggle room to fire up TLTROs at a future date if needed. 

With a skillful combination of recognizing the recent poor data but highlighting underlying strengths, Draghi has bought time until the next meeting on March 7 — when updated quarterly economic forecasts will be available. For now the currency is buying it.

An important question is the timing of the next rate hike. Draghi managed to avoid confirming the expectations that officials set toward the end of last year, for the first rate increase to come by the fourth quarter of 2019. It’s easy to see how that timing will slide into 2020. If it does, that means Draghi will leave office at the end of October without ever having raised interest rates during his term.

But that doesn’t really matter right now. The main point is that the president, once more, put across his message without stoking market volatility. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.

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