Draghi Says Euro-Area Turnaround Warrants Policy Dial-Back
Why ECB drop its pledge to expand monthly bond purchases if needed.
(Bloomberg) -- The European Central Bank unexpectedly dropped a pledge to ramp up bond buying if the economy deteriorates, saying the turnaround in the outlook has given it confidence to change a key part of its monetary-policy guidance.
In what the ECB President Mario Draghi said was a unanimous decision, policy makers in Frankfurt surprised investors by ending an easing bias on quantitative easing, effectively a conditional promise to increase debt purchases in “size and/or duration” if needed. But he said downside risks remain, and added rising trade protectionism to the list of threats.
“These are unlikely contingencies now, the ones that would suggest that we would activate this easing bias,” Draghi said Thursday. The language “was introduced in 2016 -- think about how different the situation was at that time.”
The revision coincided with an upgrade to the ECB’s outlook for 2018. At the same time, Draghi emphasized that the program, currently scheduled to run at a monthly pace of 30 billion euros ($37 billion) until at least the end of September, will continue until inflation is solidly back on track toward its goal.
The euro jumped as much as half a cent after the policy decision, but gave up those gains as Draghi spoke. It was down 0.7 percent at $1.2322 at 5:32 p.m. Frankfurt time.
Policy makers repeated that interest rates will stay unchanged “well past” the end of the bond-buying program. Interpreting the day’s events, Capital Economics said that means the loosening bias is “gone, but tightening is some way off.”
While the ECB is taking baby steps, a notable hawkish spin has emerged at multiple central banks in recent months. Bank of England policy makers say they may need to raise rates faster than previously anticipated and New Federal Reserve Chairman Jerome Powell has talked up the economy so much that there’s talk of four U.S. hikes this year.
At the ECB, the new projections showed growth and inflation broadly similar to the picture of solid economic momentum seen three months ago. Inflation is projected to average 1.7 percent in 2020, compared with the ECB’s goal of just under 2 percent.
Even after 2017 saw the strongest expansion in a decade, Draghi stressed the downside risks, pointing specifically to protectionism. U.S. President Donald Trump’s plan to impose tariffs on foreign steel and aluminum set off retaliatory threats, raising the specter of a global trade war.
“If you put tariffs against what are your allies, one wonders who the enemies are,” he said. “We are convinced that disputes should be discussed and resolved in a multilateral framework and unilateral decisions are dangerous.”
The president also took questions on a host of other risks complicating the ECB’s task:
Exchange Rates
“The Governing Council will continue to monitor developments in the exchange rate and financial conditions with regard to their possible implications for the inflation outlook.”
Italian Elections
“What we’ve seen in the past few cases of election outcomes doesn’t suggest that markets reacted in a way that would undermine confidence.”
“I can only say the euro is irreversible.”
Global Financial Deregulation
“There are two main risks: one is the one mentioned related to trade. There’s also another risks, less mentioned these days, the risk of financial deregulation in other major jurisdictions.”
“I would flag this as a major risk for the years ahead.”
Presidential Succession in November 2019
“If you keep on asking questions as if it’s tomorrow, I’m going to leave. I still have quite a time.”
“I may be willing to answer questions about myself at a date that’s closer to the ending of my mandate than today.”
--With assistance from Fergal O'Brien Alessandro Speciale Carolynn Look Jana Randow Craig Stirling Ott Ummelas Zoe Schneeweiss Catherine Bosley Iain Rogers and Chad Thomas
To contact the reporter on this story: Piotr Skolimowski in Frankfurt at pskolimowski@bloomberg.net.
To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Fergal O'Brien, Brian Swint
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