Draghi's Blurry Guidance Still Lights the Way to ECB Exit

(Bloomberg) -- Mario Draghi, perhaps one of the most relaxed central-bank communicators in recent years, can stumble over his lines for once without anyone really losing the plot.

On Thursday, the European Central Bank president found himself with an undeniably difficult task: Be upbeat about the obviously firming euro-area recovery, without giving a signal that monetary policy is about to become less supportive before that moment has come.

And as if in recognition of the difficulty of trying to say two things at once, Draghi had to pause at least twice while answering questions to consult his written notes and gather his line of argument. The message, somehow, remained clear enough.

The upshot is that the ECB kept rates and stimulus settings on hold, and stuck to its “forward guidance” that interest rates will stay low, or lower, beyond the end of the current asset-purchase program in December. But Draghi also acknowledged the upbeat economic outlook by adding later that it’s less likely that rates will have to be cut, and that there’s no longer a “sense of urgency” in monetary policy.

“Given the fact that we can’t yet say that we are there with a self-sustaining inflation rate,” the Governing Council “preferred to keep this option in the language,” Draghi said, referring to the by-now standard commitment to keep interest rates “at present or lower levels for an extended period of time.”

Euro Jumps

And despite the repeated commitment to low or lower rates, the euro rose as much as 0.7 percent during the press conference, before paring back gains, propelled also by the news that there’d be no further long-term loan programs for now. But “the expectation, the probability of an expectation that it will actually materialize into lower level, has gone down,” Draghi said.

The single currency ended the day 0.3 percent higher and was up another 0.3 percent as of 10:59 a.m. Frankfurt time on Friday, trading at $1.0613.

Whether the mixed message was intentional or not, it neatly set the scene for a gradual progression that ought to take place during this year, as quantitative easing is slimmed down to 60 billion euros ($63 billion) a month from April and the currently scheduled end of bond buying, in December, approaches. Investors already have higher borrowing costs in sight and are debating the sequence in which the ECB will normalize monetary policy.

Draghi evaded a question about whether or not the central bank can increase interest rates before the end of QE -- but essentially left it open. Inflation was nominally above the ECB’s goal last month when it reached 2 percent, yet without real evidence that it’s sustainable over the medium term at those levels, Draghi’s stance is that such a discussion is premature.

Instead, the ECB president focused on the real-world matter of wages, which despite the recovery haven’t really delivered significant benefits to ordinary euro citizens. Inflation feeding through to wages -- known as a “second-round effect” -- is what the ECB wants to happen now.

“We haven’t seen yet any significant development on the wages front, and that is the key point,” Draghi said. “We are more optimistic about the growth forecast, we have to see how these improved prospects, as far as growth is concerned, translate into higher headline inflation.”

That reticence is evidence that the ECB is, perhaps above all else, wary of choking the recovery by tightening policy -- heralding an earlier end to QE or higher rates -- too soon, and repeating the “mistake” of 2011, when it raised rates into the teeth of a recession.

“We got the confirmation on growth and they’re not ready yet to remove the easing bias on forward guidance, so they’re certainly not ready to taper,” said Richard Barwell, an economist at BNP Paribas Investment Partners in London. “The emphasis on wages is 100 percent right. If they cut the easing bias and then cut the pace of purchases without there being a sustained rise in wage costs, then we could legitimately ask: what are you guys doing?”

--With assistance from Stephen Spratt Piotr Skolimowski and Zoe Schneeweiss

To contact the reporter on this story: Jeff Black in Frankfurt at jblack25@bloomberg.net.

To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Alister Bull