Draghi Says See You in June as ECB Clears Deck for EasingStefan Riecher
Mario Draghi has primed investors for action next month.
With the threat of deflation still stalking euro-area economies that are barely out of recession, the European Central Bank president all but committed himself to providing further stimulus at June’s monetary policy meeting.
After keeping rates at record lows today, Draghi told reporters that the 24-member Governing Council is “comfortable with acting next time.” He underscored that position with comments showing a heightened concern that a rising euro will depress prices and derail the recovery.
“I don’t see how Draghi can escape some kind of action after this pre-commitment,” said Frederik Ducrozet, an economist at Credit Agricole SA in Paris. “He might surprise us with the type of action he takes; not with the timing any more.”
Draghi’s remarks sent the euro and money-market rates plunging as investors bet the ECB will deliver on its long-standing pledge to act if needed. The comments were reminiscent of his predecessor, Jean-Claude Trichet, who typically signaled rate increases, though not reductions, a month in advance using the phrase “strong vigilance.”
“One might suggest that there is an ostensible drift back to the old days of Trichet-style communication,” said Marc Ostwald, strategist at Monument Securities Ltd. in London. “It is now nigh on impossible for the ECB not to act in June.”
While Draghi gave no sign that the radical option of quantitative easing is imminent, the path of the euro and new economic forecasts next month may provide the rationale for the unprecedented step of negative interest rates.
“The strengthening of the exchange rate in the context of low inflation is cause for serious concern,” Draghi said in Brussels. Policy makers want to see the ECB’s staff economic projections, scheduled to be released after the June 5 rate meeting, before making a final decision, he said.
The euro fell from a 2 1/2 year high, dropping to as low as $1.3849 from $1.3993. It was at $1.3868 at 6:13 p.m. Frankfurt time. Overnight interbank borrowing costs declined, making the forward curve the most inverted since December 2011.
The ECB left its benchmark rate at a record low of 0.25 percent and the deposit rate at zero. The marginal lending rate was held at 0.75 percent.
Policy makers are still trying to spur a sustainable recovery in the 18-nation euro area’s southern flank after a debt crisis that threatened to break the bloc apart as recently as two years ago.
Inflation in April was less than half the ECB’s target of just under 2 percent for a seventh month. Even so, the rate of 0.7 percent marked a rebound from March, when it slowed to the lowest rate in more than four years.
Recent economic data have signaled that the currency bloc is rebounding from its longest-ever recession, which ended last year, and survey indicators point to a further pickup in activity.
Service industries in Spain and Ireland, which have both exited international bailout programs in the past six months, posted the fastest growth since before the financial crisis in March, according to purchasing managers indexes by Markit Economics this week. Consumer confidence in the euro area unexpectedly increased in April, a European Commission report showed last month.
Those figures weren’t enough to persuade Draghi to deviate from his position that the recovery is fragile and the risks remain on the downside.
He said policy makers discussed all tools available, including extending the offer of unlimited central-bank cash against collateral. Other possibilities include long-term loans to banks and halting the sterilization of liquidity created by crisis-era bond purchases.
“Draghi stressed that the council was unanimous in being dissatisfied with the prolonged period of low-flation and is ready to take action,” said Elga Bartsch, chief European economist at Morgan Stanley in London. “The debate seems to be on what policy measures to take and not on whether to take any at all. See you in June, Mr. Draghi!”