Draghi Sets ECB Up for Six Weeks of Chatter

Updated on
  • ECB president makes minimal language shift as economy improves
  • Governing Council debate may spill into open ahead of June

Draghi’s Degrees of Dovishness and Nod to the Downside

Mario Draghi made the smallest of concessions to the members of his Governing Council itching to talk about an exit from extraordinary stimulus.

The European Central Bank president’s acknowledgment that the risks to the euro area’s recovery, while still to the downside, were “moving toward a more balanced configuration” marked an incremental change in his carefully-weighted comments on the outlook for the currency bloc. While that cautious alteration was unanimous, it could still leave the field open for public discord.

Over the next six weeks until the June 8 policy meeting, the ECB risks being buffeted by Governing Council members resuming their public airings of when and how to wind down asset purchases and start raising interest rates. An economic recovery that Draghi himself said is “solidifying” won’t leave them short of evidence that the time to act is approaching.

“This may be something Draghi is unable to prevent,” said Frederik Ducrozet, an economist at Banque Pictet & Cie in Geneva. “There will be some noise, and any small signal from a Governing Council member from a small country may have an impact, given the over-sensitivity to the subject.”

The ECB president reminded everyone that even with the economy performing better, higher prices still have to show a consistent upward trend. Momentum in euro-area manufacturing and services output is at its fastest in six years, and data on Friday showed underlying inflation bounced to the highest level since 2013. Consumer prices rose an annual 1.9 percent in April, slightly more than economists anticipated.

Opinion Diverging

The risks surrounding the region’s recovery were also underlined by data on Friday. France’s economy expanded less than forecast in the first quarter as consumer spending weakened and exports dropped.

Stressing that his mandate is inflation, not growth, Draghi made clear that the currency bloc’s brightening economic prospects won’t be enough to sway the central bank until they start translating into reliably faster price gains.

In that light, it’s by no means certain that the next policy meeting will yield a substantial change to the ECB’s communication or give any insight on the central bank’s strategy for the period ahead. A wide range of opinion still exists, from governors who may support a rate hike soon after asset purchases end to others who are much more hesitant.

“Even after quantitative-easing tapering, it will probably be inappropriate to expect interest-rate hikes,” Governing Council member Vitas Vasiliauskas said in an interview with Lithuania’s Verslo Zinios newspaper published on Friday. “I do not think that anything dramatic could happen next year.”

In the meantime, if Governing Council members like Austria’s Ewald Nowotny or Dutch governor Klaas Knot stay true to form, they won’t hold back from expressing their views on the exit discussion out loud. Even Executive Board member Benoit Coeure has deviated from the party line, by saying this month that his personal assessment is that the risks to the outlook are already balanced.

Draghi said that the Governing Council didn’t get any closer to any exit talk on Thursday, and that neither the sequence nor changes to the forward guidance were debated.

Amid the noise after the March meeting, the ECB president intervened with a speech on April 6 in an attempt to muffle it. Draghi spelled out that the economy offered no reason to change stance or accelerate the announced policy sequence -- that asset purchases would be reduced and eventually stopped first, with rate hikes following only after a significant pause.

With Draghi’s guidance essentially the same after Thursday’s meeting, investors may see a divergence between his statements and economic reality, according to Lena Komileva, chief economist of London-based research company G Plus Economics Ltd.

“The ECB is still learning the art of managing a hawkish tone on growth with an easing bias on inflation risks,” she said. “For a market less confident about the ECB’s future guidance after this meeting, this will mean more volatility in store for the June policy meeting.”

— With assistance by Carolynn Look, Piotr Skolimowski, Jana Randow, Jill Ward, Catherine Bosley, Zoe Schneeweiss, Brian Swint, Maria Tadeo, and Fergal O'Brien

(Updates with inflation data in fifth paragraph.)
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