Draghi’s dovish signals at the ECB Watchers Conference

3 10

The ECB held its ECB Watchers conference on Wednesday last week. Policy makers at the central bank reassured that they remain cautious on making further adjustments to the monetary policy.

The comments underlined the risks towards growth and the slower pace of inflation which has failed to see any inflationary pressures building despite the faster pace of economic growth.

Speaking at the conference in Frankfurt, the ECB President Mario Draghi said, “We currently see inflation converging towards our aim over the medium term, and we are more confident than in the past that this convergence will come to pass.”

Draghi however reiterated that officials will need to see further evidence of inflation moving in the right direction and until then, policy makers will remain “patient, persistent and prudent.”

The comments come following the previous week’s ECB monetary policy. At the meeting, the central bank dropped its dovish forward guidance which previously pledged to increase the size of the central bank’s QE program if the economic outlook deteriorated. This was however clarified at the press conference where Draghi reminded reporters that the central bank remains committed to act in the event of deteriorating economic signals.

The central bank left its monetary policy unchanged at the March ECB meeting and the ECB is expected to continue purchasing its monthly asset purchases worth 30 billion euro until September.

While initially there was speculation in the markets that the ECB would stop its QE program by September, which seems to have changed given the slow pace of inflation increase. Some ECB observers are now expecting to see a possible extension until the end of the year if inflation continues to rise at the sluggish pace of growth.

Despite the Eurozone economy painting an optimistic picture, the ECB President Draghi pointed that growth and inflation outlook remain two key risks while setting central bank policies.

Speaking on the risks, the ECB president noted that the global environment remained particularly vulnerable to the trade policies from the U.S. Global trade was seen picking up momentum since last year but the outlook remained highly uncertain.

For the euro area, the risks are expected to be minimal, Draghi said in an apparent reference to the recent announcement from President Trump who imposed fresh tariffs on steel and aluminum imports to the U.S. This sparked a series of reactions from some of the key trade partners with the U.S

However, Mexico and Canada were exempt from the tariffs while Trump also invited some of the nation’s key allies to negotiate on the same.

Leaders from the EU reacted strongly noting that similar measures could be taken against the U.S.

According to Draghi, while the initial risks remain limited, there could be serious consequences to trade especially if the newly announced protectionist measures snowball into a global trade war.

Draghi also said that one of the side effects of the protectionist measures could be the risk to the foreign exchange markets and the financial markets in general. Talking about the euro currency which has gained over 5% against the USD, the ECB President said that the exchange rate appreciation would most likely slow the pace of inflation increase and does not reflect the fundamentals in the region.

He said that ECB officials were keeping a close watch on the developments in the foreign exchange markets.

Speaking at another conference, Vitor Constancio, the vice president of the ECB said that the Eurozone economy still requires a lot of monetary policy support due to inflation.

“Our price stability mandate continues to require maintaining a very accommodative monetary policy stance which has been decisive for the economic recovery and gradual normalisation of inflation,” he said.

Constancio however assured that contrary to some views, the asset prices in the euroarea do not point to any signs of overvaluation and ruled out that it would not fuel any credit bubbles.


or practice on DEMO ACCOUNT

Trading CFDs Involves high risk of loss