Draghi Does Not Give An Inch, Governs For The Whole Eurozone

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It was expected Draghi to avoid any discussion of early exit from QE and he did so. As reported by BoFML “The ECB’s president delivered on all counts, and quietly demonstrated a willingness to resist the pressure from German public opinion (and increasingly political authorities)”. The ECB have clearly stated the possibility to buy more if need be in the prepared statement, and Draghi was very dismissive on exit strategies, repeatedly stating that the Council “did not discuss it” and labelling this “high class problems”.
Looking through “transient effects”, looking for “self-sustained” inflation
The message on inflation is quite clear: Converging towards “below but close to 2%” will be consistent with looking through “transient effects” but will also have to be “self-sustained” (i.e. able to withstand the end of the ECB’s extraordinary support). According to BoAML’s analysts:
That’s new and in our opinion this means that crucially the outlook for the real economy will have to be robust enough – consistent with closing the output gap – for the ECB to remove the monetary crutches. In other words Draghi has given himself a lot of room to dismiss the ongoing acceleration in headline inflation.

ECB policy is for the whole euro area

“When repeatedly asked about what the ECB policy means for Germany (in particular German savers), Draghi did not give an inch”, experts point. Among the conditions for the convergence of inflation towards the ECB’s target he mentioned the need for the acceleration in prices to be observed “across the whole euro area”, which implicitly means accepting some over-shooting in Germany. He also stated that the recovery of the whole Euro area was in the interest of Germany because this would create the conditions for high real yields.

So far, so good, but new forecasts this spring may complicate matters

At this juncture he can count on a wide consensus within the Governing Council. That two weeks ago the usually dovish Yves Mersch dismissed any idea of rapidly revisiting the stance was quite telling in view. This may change when the ECB gets the next batches of forecasts. BoAML’s experts think:

While March is too early for a profound revision in the central bank’s outlook on core inflation, things may be more complicated when we get to the June batch. Indeed, in our forecasts we expect headline inflation to peak around 1.7% yoy in April. However, latest energy prices suggest our 1.4% headline inflation forecast for January is subject to upside risks to the tune of 10-20bps, which implies risks of inflation even closer to 2% in April.

The ECB will meet in June just in time to get the flash estimate for May. If core inflation exceeds our central case by then – and the period around Easter can be quite erratic for price measurement – then a tough debate could take place within the Council about a reduction in the pace of buying before the December term.

About the Author

Julia Pastor
Julia Pastor has a broadly experience in business writing for Consejeros Media Group at Consejeros, Consenso del Mercado and The Corner. Previously, she worked for the financial news agency GBA and contributed to El País Business. She holds a Master in Financial Journalism and a degree in English from the Complutense University in Madrid.