ECB’s Draghi Doesn’t Rule Out Further Rate Cuts

In his regular press conference following the latest ECB monetary policy decision, President Draghi’s main message was one of determination to combat low inflation. The bank is ready to act again if warranted, but he also called for patience following the aggressive moves last month.

He stated that interest rates would remain at current or lower levels for an extended period of time, which was a slight shift from his closing remarks at the previous press conference when he stated that he did not expect interest rates to decline further.

He insisted that the governing council would will act again to ease policy if warranted using all instruments available and that time was needed to give policies time to have their intended effect.

Inflation rates were expected to turn negative over the next few months before picking up later in 2016. He was again forceful in his rhetoric over the need to combat inflation being too low adding that it is critical to ensure that very low inflation does not become entrenched. This remains a key focus for the ECB as they remain concerned that inflation expectations will become de-anchored and threaten to trigger wider deflationary pressures.

As far as the economy is concerned, risks were still tilted to the downside, but there was greater optimism surrounding financing conditions as the decline in bond yields triggered by the quantitative easing programme is having the desired effect.

Draghi stated that the bank had not spoken about ‘helicopter money’, where money is injected directly into the economy. He insisted that there was unanimous support for the monetary stance, which suggests Bundesbank chief Weidmann is on board as Draghi pushed back against political criticism of the ECB from within Germany. He also called on other channels, namely fiscal policy to support the economy in another swipe at politicians.

There were no specific references to the Euro with the exchange rate not a target for monetary policy and he did not engage in any verbal intervention in an attempt to push the currency weaker. He did, however, comment that the ECB’s monetary policy will continue to diverge from other jurisdictions better placed in the economic cycle which presumably is a reference to the Federal Reserve and the potential for further interest rate increases and the Euro may struggle to sustain initial gains.

With no real dovish surprises from Draghi, the Euro moved higher as EUR/USD tested the 1.1400 area before backing away slightly and the dollar index continued to move lower with losses of just over 0.50% on the day. Bunds continued to register sharp losses of over 75 ticks, while the Eurstoxx 50 equity index was down less than 0.50%.

Source: Economic Calendar


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