Five Questions for Mario Draghi to Answer TodayAlessandro Speciale
Here are five things to watch for from Mario Draghi today. The European Central Bank president holds a press conference at 2:30 p.m. in Frankfurt, 45 minutes after the Governing Council’s announcement on interest rates.
Is more easing on the way?
After the ECB unveiled an unprecedented stimulus package in June, most analysts had expected officials to hold off on new measures until the end of the year. An economy that stalled in the second quarter, slowing inflation and the crisis in Ukraine changed the picture. Draghi acknowledged these developments, and their effect on inflation expectations, in a speech at Jackson Hole, Wyoming on Aug. 22, setting the stage for more stimulus, including quantitative easing.
Six of 57 economists surveyed by Bloomberg News now predict a cut in the benchmark rate to 0.05 percent from the record-low 0.15 percent set in June. In July and August, no economist predicted a lower rate.
Draghi said in June that “for all the practical purposes, we have reached the lower bound,” even as he left the door open open to “little” adjustments.
Will there be changes to the TLTROs?
The ECB may make the terms of its targeted longer-term loans, the centerpiece of its June package, more attractive by cutting its benchmark rate or erasing the premium it plans to charge banks, analysts say. The current plan -- aimed at supporting the recovery by boosting lending -- offers funding at 0.10 percentage point above the benchmark rate. A rate cut would make what is already, according to Draghi, a “very, very attractive” offer even more appealing.
The first round of the TLTRO operation is due this month. Estimates of take-up in a Bloomberg News survey fell in August as the economic outlook for the euro area clouded. Italy’s seven biggest banks will ask to borrow as much as 30.3 billion euros ($40 billion) this month, according to a Bloomberg News report.
What’s happening with inflation?
A key thing to watch for is any change in the inflation wording of Draghi’s opening statement. In August, he said officials see “both upside and downside risks to the outlook for price developments as limited and broadly balanced over the medium term.”
The ECB will also issue new economic forecasts. It currently predicts price growth will gradually accelerate over the next 2 1/2 years, climbing from 0.7 percent this year to 1.1 percent in 2015 and 1.5 percent in the last quarter of 2016.
Inflation, which the ECB aims to keep just under 2 percent, has been below 1 percent since October and fell to 0.3 percent in August, the lowest in almost five years. In Jackson Hole, Draghi reaffirmed that most factors pushing down inflation -- from the exchange rate and geopolitical tensions to food and energy prices -- are temporary. Core inflation edged up in August to 0.9 percent.
Still, the ECB President recognized that “if this period of low inflation were to last for a prolonged period of time the risk to price stability would increase,” and said inflation expectations had “exhibited significant declines.”
Let’s cut to the chase, is quantitative easing coming?
After Draghi’s Jackson Hole speech, when he said the Governing Council “will use all the available instruments needed to ensure price stability over the medium term,” analysts from Berenberg to JPMorgan Chase & Co. said the chances of large-scale asset purchases have increased. While most analysts think QE, if it happens, will come in 2015, Citigroup Inc. economists predicted last month the central bank will unveil a QE program in December valued at 1 trillion euros.
At the same time, the technical, political and legal hurdles to asset purchases remain high, especially if they involve government bonds.
The ECB is also accelerating preparations to buy asset-backed securities. The central bank hired BlackRock Inc., the world’s biggest money manager, to advise on a program with the twin aims of reviving the shrinking European securitization market and providing another liquidity tool. ABS purchases may form part of a larger QE program.
What has Draghi been telling Europe’s leaders?
The ECB President met with France’s Francois Hollande and Italy’s Matteo Renzi in recent weeks and spoke on the phone with German Chancellor Angela Merkel. While such contacts are not news in themselves, they came as France and Italy have called for more flexibility in European Union deficit rules, something Germany opposes.
In Jackson Hole, Draghi also said governments’ “fiscal policy could play a greater role” in supporting euro area’s growth, alongside monetary policy and structural reforms.