Even when Mario Draghi only affirms what everyone expects him to say, without changing any of his previously stated views, it's news. During his speech on Monday he didn't say anything different than what's already been said, nor did he keep quiet.
Instead, the European Central Bank president maintained that the ECB’s asset purchase program would come to an end as planned in December – “subject to incoming date confirming our medium-term inflation outlook.”
That means it's dependent on the central bank's interpretation of the data because there is nothing really in the figures that indicate inflation is nearing their 2-percent target. They have simply chosen to believe that these data will in fact follow that path. Even Draghi admitted that “measures of underlying inflation” are still “muted.”
Nordea Markets analysts put year-on-year core inflation at only 1.1 percent in October. Headline inflation of 2.2 percent was due to onetime pricing factors for Italian education and package tours. The recent decline in oil prices will lead to negative revisions in that headline figure and core inflation will remain steady at 1.1 percent, they predict.
The ECB president also acknowledged that economic data is weaker. Euro area GDP growth was only 0.2 percent in the third quarter, compared with 0.4 percent in the first and second. Some of the slowdown, at least, seems temporary, due to the cutback in German auto production because of delays in getting new emissions certification.
Draghi’s affirmation of ECB intentions before the sparsely attended meeting of the European Parliament’s Economic and Monetary Affairs yesterday nonetheless indicated that two weeks ahead of the actual governing council meeting, Draghi personally has not changed his opinions. There had been speculation that the possible breakdown of Brexit talks or a confrontation with Italy over its budget, might tempt the ECB to hold off on closing down its asset purchases. But Brexit may still possibly muddle through and the Italians are already backing down.
Moreover, as Draghi insisted again Monday, even though the ECB is ending its new purchases, monetary policy remains quite accommodative. That's because the ECB's balance sheet is bloated by its €2.6trn in asset purchases. As well, it is reinvesting principal as bonds mature.
And, of course, short-term rates remain at zero. In addition, analysts are increasingly convinced the ECB will offer targeted long-term refinancing operations (TLTRO) to keep banks, especially Italian banks, amply supplied with liquidity.
In his testimony, Draghi spent much of the rest of his time trying to convince the deputies of the importance of a central eurozone budget to provide a big fiscal pot for the area and a counterbalance to monetary policy. Halting steps in recent proposals for an EU fund for investments and the Franco-German proposal for a small Eurozone budget indicate the idea is gaining acceptance, he suggested.
There may still be room for a surprise in Draghi’s stance but he remains sanguine about the balance of ECB monetary policy at present. Just as he has not yielded to pressure to speed up the move to tightening, he is showing no signs of slowing down his pivot by extending asset purchases beyond the year-end expiration.
The euro weakened against the dollar after Draghi’s remarks on slower growth in the euro area. German business confidence as measured in the Ifo index also fell for the third month in a row, depressing the euro.