(Bloomberg Opinion) -- There’s a question that anyone who watched Mario Draghi’s press conference on Thursday must ask themselves: Should we look at the European Central Bank’s slightly guarded official position or listen to the more dovish messages from the president?
The answer will determine one’s confidence about the central bank’s ability to fight a new euro zone slowdown. It might also influence whether that downturn happens, given that any fears about a lack of action from the ECB will weigh on investor sentiment and, as a result, on economic activity.
The bank is facing a new phase of uncertainty, as financial markets worry that the various U.S. trade conflicts might turn into something worse. The labor market in the euro zone remains strong, and economic activity in its services and construction sectors is solid. But the risk of protectionism is taking a toll on manufacturing. The ECB revised this year’s growth forecasts slightly upwards, but it downgraded estimates for 2020 and 2021. Inflation expectations are significantly lagging the bank’s target of just below 2 percent. While Draghi noted this was a global phenomenon and that there was no risk of deflation, he recognized that the ECB needed to address the problem.
In its official communication, the bank announced a series of measures to support growth and inflation; the package isn’t exactly overwhelming. There were the expected details of its new round of cheap loans to the banks. The pricing – which can fall as low as the deposit rate plus 0.1 percentage points – is generous, and will support lenders in the most vulnerable euro states. The ECB also changed its forward guidance, saying that its key interest rates will stay steady through the first half of 2020, adding six months to the previous date range. But it did not add a reference about rates possibly falling even lower than where they are now. At a time when the U.S. Federal Reserve is talking about cuts, that’s a big omission.
Draghi’s press conference was more promising. He talked about the instruments that can be used if things get really difficult. Unlike previous meetings, he didn’t shy away from identifying the tools: A restart of quantitative easing, an extension of the forward guidance, and, yes, even more rate cuts. Why the last of these wasn’t included in the official forward guidance is anyone’s guess.
Investors now have a choice. They can fret about the ECB being in two minds about how generous it will be in the future; the revised forward guidance looks like a classic compromise between euro zone central bankers who want low rates for longer, and those who are worried about the effects of negative rates on the banking system. Or they might prefer to look at Draghi’s hints of unfettered stimulus. “The policy space is there,” he said. “If contingencies were to materialize, the governing council stands ready to act and use all the available instruments.”
Draghi has been so dominant in his tenure that, in normal circumstances, investors would have little doubt in trusting him. But these are not normal times. With the president due to step down in the autumn, there is no clarity over his successor. The candidates include Jens Weidmann, president of Germany’s Bundesbank, who opposed Draghi’s famous “whatever it takes” pledge – where the ECB promised to buy unlimited quantities of short-term bonds of any country in crisis, provided it signs up to a program of financial assistance.
On Thursday, Draghi tried to make the case for continuity, insisting that any president only has limited powers anyway to shape the ECB’s decisions. “It is the governing council that decides,” he said. Yet his own power belies that and the succession question does leave huge unanswered questions on monetary policy in the euro zone. Some investors may want to believe Draghi’s promises – but he won’t be there for long.
To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Ferdinando Giugliano writes columns on European economics for Bloomberg Opinion. He is also an economics columnist for La Repubblica and was a member of the editorial board of the Financial Times.
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