European Central Bank (ECB) President, Mario Draghi. (Photographer: Alex Kraus/Bloomberg)

Draghi Employs Reverse Psychology on Market Rate Expectations

(Bloomberg) -- Market expectations that interest-rate hikes in the euro area might be delayed could end up becoming the reason that they aren’t.

That’s the message European Central Bank President Mario Draghi gave journalists when asked his view on recent market pricing, which suggests rates won’t rise until the first quarter of 2020. Investors repriced their bets after being confronted with a spate of disappointing economic data lately, even though the ECB’s own policy language implies the possibility of borrowing costs being raised as early as next autumn.

That’s supporting growth now, and it could provide enough of a fillip to the economy to make it possible to raise rates when the ECB expects.

“Markets are reading the economy and they project a rate increase at that time because they think the economy will worsen in that fashion,” Draghi said on Thursday. While this “shows that they well understood our reaction function,” he added that “in so doing they make financing conditions easier, so we may well never get there.”

That synopsis echoes former Bank of England Governor Mervyn King’s Maradona theory of interest rates, which holds that central bankers can sway market expectations without changing policy. In the 1986 World Cup, the Argentinean soccer star scored against England by running straight at the goal from midfield -- beating five players who expected him to turn left or right on the way.

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