What Draghi Said on QE, Market Volatility, Greece

What ECB's Draghi Really Said at Press Conference

Mario Draghi addressed questions on recent market volatility and scope for further ECB action after the central bank downgraded growth and inflation forecasts and raised the limit of a country’s debt it can buy citing downside risks to the euro-area economy.

Here's the checklist of what Draghi said at yesterday's press conference:

Inflation

  • HICP rates will remain very low in the near term, may even turn negative toward end of year also due to base effects of oil; impact will be “transitory” due to oil.
  • Inflation likely to pick up during 2016 and 2017 although more slowly than anticipated thus far.
  • Downside risks to September projections remain.

QE

  • Purchase limit on issue share raised to 33 percent from 25 percent, only when no blocking minority.
    • Didn’t discuss the issuer limit; size, or pace of the program.
  • Program is having a favorable impact on economy.
  • For now, will fully implement monthly asset buys; can adjust size, duration if needed; didn’t discuss detail of QE modification.
    • No ECB member wanted expansion of QE today.
  • Governing Council wanted to emphasize its willingness to act, its readiness to act, and its capacity to act.

China

  • Prospects for China’s economy have weakened, affects trade and confidence.
  • Lower external demand owing to weaker growth in EMs weighs on euro-area growth outlook.
  • Risks remain to the downside, reflecting heightened uncertainties related to the external environment, notably current developments in EM.
  • Economic recovery is expected to continue but at a somewhat slower pace reflecting the slowdown in EM economies
  • Still premature to conclude whether these developments could have a lasting impact on output and inflation; downside risks have increased.
  • Cutoff for projections was August 12 so events that took place since then are downside risks to the projections themselves; financing conditions since then and even before have tightened.

Market Volatility

  • What happened in the last few weeks is basically twofold: first a worsening of the situation in several EM economies.
    • Second, a tightening of financial conditions across the board.
  • Have to see if this is short-term volatility or permanent volatility.
  • Need to decide whether medium term outlook has worsened.
  • Probably true that risk premia are higher.

Greece

  • Greece must pass some milestones for waiver reinstatement, GGB QE eligibility.
  • For waiver to be reinstated the country has to be in a program for assistance, has to comply with it, and so has to show strong ownership and consistent and significant implementation.
  • Central banks may be allowed to publish ELA details if deemed necessary for financial stability.
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