Draghi’s Market Dialog Moves to Davos After ECB’s Groundhog Day

Nouriel Roubini: Global Economy Not Back to 2008
  • ECB president primes markets for more stimulus on March 10
  • Persistent ultra-low price growth worries policy makers

A day after kicking off yet another European Central Bank stimulus review, Mario Draghi used Davos as a platform to convince investors he’ll do what’s needed to reignite consumer prices.

“We’ve plenty of instruments,” the ECB president said on Friday at the World Economic Forum in Switzerland. “We have the determination, and the willingness and the capacity of the Governing Council, to act and deploy these instruments.”

Mario Draghi
Mario Draghi
Photographer: Matthew Lloyd/Bloomberg

The comments reflect the ECB’s agreement on Thursday to reexamine its strategy of a 1.5 trillion-euro ($1.6 trillion) bond-purchase plan and negative interest rates. Over the seven weeks until the March 10 gathering, officials are likely to try to guide investors to avoid a repeat of last month’s meeting, when fresh stimulus fell short of predictions stoked at the previous decision.

“It’s a bit like Groundhog Day,” said Carsten Brzeski, chief economist at ING-Diba AG in Frankfurt, reminiscing about the 1993 Bill Murray comedy. “The only question is, will he fulfill the dreams of markets this time around, or will he disappoint again?”

ECB Executive Board member Benoit Coeure, who is responsible for the central bank’s market operations and was a key architect of quantitative easing, reiterated the pledge on a separate panel at Davos. “We are very committed” to returning inflation to the goal of just under 2 percent, he said.

The euro is set for its biggest weekly drop this year as traders brace for more stimulus. The currency traded at $1.0806 at 2:11 p.m. Frankfurt time and is down about 1 percent this week.

Draghi’s challenge has become tougher as China’s economic slowdown increasingly drags on global trade and disrupts markets. Euro-area inflation was 0.2 percent last month and hasn’t been near the goal since early 2013.

The ECB president said the three current drivers of the euro-area recovery are monetary policy, a fiscal stance that is “broadly neutral if not slightly expansionary,” and lower energy prices that support disposable income. Yet policy makers are worried over the risk that ultra-low inflation will persist, undermining the economic revival.

“There’s less reason to be optimistic” over the outlook for consumer prices, he said. “It’s mostly because of the collapse in oil prices but also because of the revision, the downward revision” of economic growth in emerging markets.

That view was backed by the ECB’s quarterly Survey of Professional Forecasters, which was published Friday. Analysts cut their euro-area inflation outlook for this year and next, and said the rate would average 1.6 percent in 2018. That’s a level the Frankfurt-based ECB less than two months ago projected would be reached by 2017. Too-low inflation risks damping wage increases and aggregate demand.

“There is the risk that the decline of the oil price also has an impact on core inflation via second-round effects, for instance due to lower transport costs,” Governing Council member Ewald Nowotny said in Vienna on Friday. On further measures, he said that “over the course of last year, we went into territories that we would have seen as unthinkable, so it’s very difficult to set limits anywhere these days.”

Slower Growth

An economic gauge also published Friday showed private-sector growth in the 19-nation currency bloc slowed to the weakest in almost a year amid volatility in financial markets. At the same time, the Purchasing Managers’ Index for manufacturing and services still points to growth of as much as 0.4 percent at the start of the year, Markit Economics said.

Draghi noted that euro-area monetary policy will diverge from the U.S. for a while, bolstering the ECB’s accommodative stance. The Federal Reserve’s decision in December to start raising its own rates was “appropriate” given the improving U.S. economy and was “flawlessly executed,” he said.

On Thursday, after the central bank left interest rates at record lows, he noted that new ECB macroeconomic projections will be published after the March meeting, including the first prognosis for 2018. Any deterioration in the outlook could provide the justification for more action.

Draghi said the Governing Council would “absolutely reject” any suggestion that it’ll do less than what’s necessary and that “we are not surrendering” to the global pressures.

Economists at JPMorgan Chase & Co. and Royal Bank of Scotland Group Plc changed their forecasts for easing to March from June. Barclays Plc Chief European Economist Philippe Gudin wrote in a note that “the new package that we predicted for June could be presented in March,” depending on developments.

Two-Way Affair

Draghi also said on Thursday that measures announced at the Dec. 3 meeting were “entirely appropriate based on the circumstances prevailing at that time” but that conditions had since changed. Still, he didn’t exclude that officials had a role in an outcome that sent bond yields and the euro surging.

“Communication is a two-way affair,” he said. “It’s very hard to put the blame of some disappointment on one side only.”

He said the Governing Council didn’t want to discuss any specific instrument and that the ECB’s technical committees would study options. However, the central bank wants to be “absolutely confident that there are no technical limits to the size of its deployment.”

That raises the question of whether the ECB is willing to go down the same path as the Bank of Japan by adding new asset classes to its QE program. As long ago as 2002, the BOJ was buying equities. Under the current program, the ECB purchases government and agency debt, covered bonds and asset-backed securities, and policy makers agreed last month to extend it to regional debt of euro-area member states.

“This is classic Draghi-speak,” said Anatoli Annenkov, senior economist at Societe Generale SA in London. “He’s reacting to the changed circumstances, but we still need to wait for the new forecasts and the council to come together. I’m not sure that means more or less action, and the markets will also need to learn from the experience in December.”

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