A James Alexander post
Mr Draghi is like a car driver who has his foot pressed down hard on the accelerator (the instruments, QE, -ve rates, TLRTO, etc, etc) but hasn’t taken the car out of first gear, or maybe second (the inflation ceiling).
The measures announced today were all in line or better than expected in terms of instruments. and the markets liked it. He had managed to surpass already high expectations.
But, dear oh dear, he messed up when talking about the future. ‘No more rate cuts until the facts change’. The trouble is the facts NOW are not so great. Ruling out further easing unless the facts change is not what the market wanted to hear. If the facts stay the same, more action will be needed.
His aides rushed him a mid-meeting restatement of his position, but it just sowed more confusion. “The facts” seemed to transmogrify into the ECBs expectations of future facts, i.e. their forecasts not playing out as expected. So no big change, maybe.
That said, I was already well disappointed before the markets turned tail, they might have done so even without the confusing guidance given in the Q&A.
I like to monitor how soon in each press conference statement he raises the dead hand of the inflation ceiling, and it was a recent record – in the second paragraph came the reiteration of the ECB’s epitaph: “close to, but below, 2%”. Even worse was to follow, he reiterated it a second time in his official statement. It was that bad.
For the first time in a while one of the journalists managed a decent question rather than just asking incredibly dull stuff on technical details. A French guy asked whether the inflation target was symmetrical. Draghi froze, recovered himself, and said that it was. I think. Though others thought not. Who really knows. And then he froze again, looking physically sick. He didn’t elaborate and none of the other useless bunch of journalists in the room asked for more.
He seems scared of discussing what he calls the inflation target/mandate/epitaph of “close to, but below 2%”.
It’s hard to know why it is such an untouchable area. Is he really frightened that it might suddenly un-anchor inflation expectations and lead to hyperinflation? Is he worried about the reaction of Europe’s unelected (by Europe) “leader”, Mrs Merkel? She is powerful, witness the mass migration she triggered when making refugee policy for Europe on the hoof.
Anyway, while Draghi refuses to change to a higher gear, the car will move incredibly slowly despite wasting immense amounts of fuel with the accelerator pressed down to the metal.
“We are reaching the limits of monetary policy, and that is causing markets a headache,” said Mark Dowding, senior portfolio manager at BlueBay Asset Management.
Is plain wrong. The markets reversal between Draghi´s announcement and the press conference is the clearest example of the power of monetary policy, for good or evil!