Tuesday , June 19 2018

Draghi promises to avoid surprises in stimulus plan

Bloomberg

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 US 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 0.2 percent at $1.2367 at 10:44 a.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 that the institution must keep its guard up against the risk of a sudden appreciation in the euro.

TRADE TROUBLES
Likewise, Draghi noted the volatility observed in financial markets last month, saying that “any further sharp repricing” must be watched carefully. He took particular aim at the potential for a trade war, after US 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.”
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.

MISSION UNACCOMPLISHED
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.

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