Draghi's Drama-Free Jackson Hole Reaffirms Slow QE Exit Message

(Bloomberg) -- Mario Draghi’s message in Jackson Hole may not have been dramatic as three years ago but was clear nonetheless: the European Central Bank will go extremely slowly about removing its monetary stimulus.

While the ECB president startled investors in 2014 by laying the groundwork for quantitative easing, his published remarks at the Federal Reserve symposium in Wyoming on Friday included nothing on policy makers’ deliberations scheduled for Sept. 7 or on their concerns over the euro’s appreciation. In response to his silence, the single currency jumped to the highest level in more than two and a half years against the dollar.

But in the subsequent discussion Draghi took the opportunity to reiterate the Governing Council’s position at its previous policy meeting in July. A self-sustained convergence of inflation toward the ECB’s goal is still nowhere in sight, labor-market factors that are weighing on wage growth and subduing inflation won’t disappear anytime soon -- meaning “a significant degree of monetary accommodation” is still warranted.

“His responses during the Q&A were more closely related to the outlook for the euro area, but stuck to the familiar narrative of weak inflation necessitating ongoing monetary accommodation,” economists Jamie Murray and Niraj Shah wrote in a Bloomberg Intelligence analysis. “As the ECB’s guidance indicates, asset purchases will continue until there is a pickup in underlying inflation -- there’s little evidence of that now.”

Bond-Buying Talks

The euro held onto its gains after the comments from the Q&A. The single currency climbed as high as $1.1941, the strongest since January 2015, and was up 1.1 percent at $1.1924 at the close of trading.

Back in 2014 at the Kansas City Fed’s mountain-resort event, Draghi made a last-minute addition to his speech to say euro-area inflation expectations were falling “at all horizons,” meeting a precondition that he had previously said would warrant QE.

More than 2 trillion euros ($2.4 trillion) of debt purchases later, policy makers are poised to discuss when and how the program will continue next year, and whether buying can be wound down. Given the complexity of ECB stimulus -- which also includes negative rates and forward guidance -- any decision may not come until the ECB’s October session.

Rather than front-running the debate, Draghi chose to focus his speech on a defense of free trade and post-crisis financial regulation -- the latter comments echoing the remarks of Fed Chair Janet Yellen who spoke a few hours earlier. In the face of plans by President Donald Trump’s administration to dismantle rules accused of stifling U.S. growth, she urged that any rollback be “modest.”

“As always seemed likely, this is no 2014 repeat -- we have to wait another fortnight for the Governing Council to hammer out an agreement on the next steps,” said Ken Wattret, an economist at TS Lombard in London. “No expression of concern about currency strength is a green light for the euro to move higher, irrespective of the agenda for the event.”

--With assistance from Carolynn Look Piotr Skolimowski Jeanna Smialek and Michael McKee

To contact the reporter on this story: Alessandro Speciale in Jackson Hole at aspeciale@bloomberg.net.

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