A James Alexander post
Yet again today we saw the “zero (long and variable) lags” in monetary policy. Central bankers moving markets and thus changing NGDP Expectations happens all the time. It’s perfectly rational too.
The ECB has been on the front foot for a while this year, especially in the first quarter when it surprised markets with the size, scope and unlimited length of its QE programme. Since the long summer break things have drifted and monetary policy has in effect tightened again. The Eurozone had got caught up in the US tightening concerns as much as anywhere.
Mr Draghi wasn’t happy and made this clear at the press conference today in Malta. The currency duly weakened and stock markets rallied. Although this may have been more due to the hint that US rates will not rise.
However, Nominal GDP growth and thus Real GDP growth cannot get that much better in the Eurozone as a whole while the overarching target remains the self-defeating one of the <2% inflation ceiling. Draghi can prevent tail risks with the QE programme, lower rates for longer and even more negative rates. But it will never be enough to see healthy growth. The inflation ceiling offsets almost all of the good work from the other policies.
Overall, monetary policy is just not that accommodative. Draghi says he and his fellow governors and their staff are working hard:
“the strength and persistence of the factors that are currently slowing the return of inflation to levels below, but close to, 2% in the medium term require thorough analysis.”
Please, Mr Draghi, it is the mandate itself that is the obstacle. In the UK we may be looking soon at the mandate and there were hints that the European Parliament is also looking into the mandate. At least talk about NGDP Targeting and you can then “Feel The Power” in time for the pre-Christmas release of Star Wars 7.