Mario Draghi repeats ECB’s forward guidance

By Marc Chandler

Today, ECB President Draghi essentially repeated his comments from last month. The key is that rates will remain at current levels or lower for an extended period and, although the economy is gradually recovering, growth risks remain on the downside. Price pressures of subdued and expectations are anchored.

The market has taken the euro to new lows for the week, just below $1.32, but trading is choppy. Implied Euribor yields have fallen, especially in the back months. European stocks are moving higher too.

In his prepared remarks, Draghi has not addressed the issue of releasing minutes and this may come out in the Q&A.

With the regional economy doing what the ECB forecast it means that a refi rate cut or fresh monetary initiatives are unlikely, or to say it a bit differently, the bar is high to additional easing.

In the press conference, most of the questions focused on the forward guidance. Draghi added some color. Full allotment of the refi operations will continue through at least July 2014. That rates will remain steady or lower for an extended period is conditioned on the ECB’s assessment of price pressures and the trajectory of the economy. 

Draghi wants to stay away from a calendar time frame and keep the focus on the economic conditions–(data not date). He also indicated that the ECB discussed whether to repeat the “stable or lower” forward guidance every time and Draghi was purposely vague and did not commit one way or the other.

There appears to have been a discussion about increasing ECB communication via minutes. Draghi confirmed that this is underway and that the executive board will make a proposal to the governing council in the fall. This would seem to suggest that some version of minutes will be provided starting late this year or early next year. Draghi did not indicate the kind of lag time was involved between the meetings.

Two general issues would likely be addressed by the minutes: rationale for action or inaction and some sense of the discussion. The challenge Draghi identified was not to politicize the discussion–which means that specific names are unlikely to be included. We see the minutes as more important as forward guidance is implemented. The minutes are often seen in the context of transparency and of course this is an element, but more importantly, it seems is that it is a tool that can help mold expectations.

Draghi also spent some time discussing the still fragmented condition of the financial system and the still present challenges to the transmission mechanism of monetary policy. He see some preliminary signs of improvement, recognizing the significant progress over the past year (since OMT, which turns 1 year old tomorrow).

The euro, which recorded a low near $1.3192 has recovered back toward $1.3250 and this corresponded with a push back in the Euribor futures, trimming their earlier gains. Look for the euro bounce to run out of steam in the $1.3280 area.

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