Draghi Promises to Avoid Surprises as ECB Tiptoes to QE End

Updated on
  • ECB president repeats call for patience, persistence, prudence
  • U.S. trade policies and euro strength seen as downside risks
"Monetary policy still needs to be patient, persistent and prudent," Draghi says.

Mario Draghi said the European Central Bank will avoid surprising investors with sudden changes to its stimulus plans, stressing that inflation is still too low and U.S. trade policies and a stronger euro are concerns.

“Adjustments to our policy will remain predictable, and they will proceed at a measured pace,” the institution’s president said in his opening speech at the annual ECB and Its Watchers conference in Frankfurt. “We still need to see further evidence that inflation dynamics are moving in the right direction. So monetary policy will remain patient, persistent and prudent.”

The euro weakened after Draghi said recent gains can’t be solely explained by the region’s economic expansion. The single currency, which has climbed almost 17 percent in the past year, was down 0.1 percent at $1.2377 at 12:31 p.m. Frankfurt time.

The comments come a week after officials unexpectedly dropped their pledge to increase the pace of their bond-buying program if economic conditions sour. While that step reflects increasing confidence in the 19-nation bloc’s upswing, Draghi used Wednesday’s speech to caution that the region isn’t out of the woods yet, with the outlook for wage growth and economic slack still uncertain.

Against that backdrop, officials have become increasingly alarmed about exchange-rate volatility which can put downward pressure on consumer prices and undermine the competitiveness of exporters. Governing Council member Philip Lane said in an interview published Tuesday that the institution must keep its guard up against the risk of a sudden appreciation in the euro.

Trade Troubles

ECB Vice President Vitor Constancio said in a speech on financial stability at the conference that the euro area is not immune to global financial-market shifts.

“The sharp movements that took place in the U.S. equity market in February 2018 demonstrated how sentiment can change very quickly -- and market participants should be well aware of this risk,” he said. “In an environment characterized by search for yield and depressed volatility, technical factors can greatly amplify initial market movements.”

Draghi noted that “any further sharp repricing” in financial markets must be watched carefully.

He also took aim at the potential for a trade war, after U.S. President Donald Trump decided to impose steel and aluminum tariffs and the European Union threatened retaliation.

While the initial impact is likely to be small, “there are potential second-round effects that could have much more serious consequences,” Draghi said. “These include the risk of retaliation across other goods and an escalation of trade tensions, and the potential for negative confidence effects which would weigh on business investment in particular.”

Continued Upswing

Executive Board member Yves Mersch said in an interview with Luxemburger Wort published Wednesday that “conflicts are not conducive to economic growth,” adding that all indicators point to a continuation of the region’s upswing.

The ECB’s stimulus currently includes a pledge to buy 30 billion euro ($37 billion) of asset until at least September and to keep its record-low interest rates unchanged until “well past” the end of net purchases. Draghi said there is a “very clear condition” for ending bond-buying -- a sustained adjustment in the path of inflation toward the goal of just under 2 percent in the medium term.

He was followed at the conference by Executive Board member Peter Praet, the institution’s chief economist, who said it’s too soon to declare “mission accomplished” on inflation. Praet did acknowledge that that ECB will need to change its language on interest rates, which some Governing Council members would like to see sharpened to give a clearer indication of when borrowing costs will rise.

“With the passage of time, the indication that policy rates will remain at their present levels well past the end of net asset purchases will gradually cease to provide sufficient guidance,” he said. “Our forward guidance on the path of our policy rates will have to be further specified and calibrated.”

For now though, he said that market signals suggest the ECB’s monetary-policy reaction function is “well understood” by investors.

To watch Draghi’s speech in full, click here.

Benoit Coeure, who oversees the central bank’s market operations, is due to speak at a closed-door panel in Berlin at 5:15 p.m.

— With assistance by Carolynn Look, Maria Tadeo, and Simon Kennedy

(Updates with comments from Constancio, Mersch starting in sixth paragraph.)
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