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Investors are on high alert for signals from the ECB, sensitive to even the tiniest changes in governors’ carefully-weighed statements.
Investors are on high alert for signals from the ECB, sensitive to even the tiniest changes in governors’ carefully-weighed statements.

Draghi Urges Financial Markets to Be Patient

Mario Draghi’s comments prompted the euro to strengthen against the dollar and government bond yields to rise

Draghi Urges Financial Markets to Be Patient

The European Central Bank must be “patient” as it pushes to bring inflation towards its target of just below 2%, president Mario Draghi said Thursday. Draghi sought to play down expectations that the bank could soon announce an end to its mass bond-buying policy at a press conference following a regular policymakers’ meeting in Frankfurt.

“We need to be persistent, and patient,” Draghi said, as “really there isn’t any convincing sign of pickup” in inflation, AFP reported.

The ECB buys €60 billion ($69 billion) of government and corporate bonds per month. Along with low interest rates and cheap loans to banks, the measure is designed to encourage growth in the 19-nation eurozone, pushing inflation towards its target.

Recent comments by central bank chiefs suggested that governors might announce a gradual winding down of the bond-buying scheme following its present cutoff date of December.

But with inflation weak despite a pickup in growth and employment in the single currency area, Draghi emphasized that monetary support was still needed to encourage price growth.

The ECB held its key interest rates and a mass bond purchase program unchanged Thursday, sending a calming message to financial markets looking for hints its easy money policy will soon end.

Interest on the bank’s main refinancing operations stood at 0.0%, on its marginal lending facility at 0.25% and on deposits at -0.4%, meaning banks pay to park money with the ECB.

 Step-by-Step Procedure

The ECB presently says it will continue buying €60 billion per month of government and corporate bonds until December this year, but is widely expected to extend and gradually wind down the program in 2018.

Just three monetary policy meetings remain before December, when the quantitative easing purchases are presently set to expire.

Most ECB watchers expect the central bank to soon announce a path out of bond-buying that will see it “taper” or wind down the scheme step-by-step next year.

While inflation is still sluggish, economic growth in the 19-nation eurozone has picked up strongly enough to dispel the fears of deflation that had prompted policymakers to launch QE.

And the ECB could soon reach technical limits to its bond buying that will make the already controversial program even more difficult to continue much beyond the end of the year. This is while investors are on high alert for signals from the ECB, sensitive to even the tiniest changes in governors’ carefully-weighed statements.

 Playing It Safe

Nevertheless, Draghi refused to be drawn on when exactly a decision might fall. The governing council—made up of six ECB board members and the governors of each eurozone country’s central bank—was “unanimous in setting no precise date for when to discuss changes”, he said.

“We simply said that our discussions should take place in the fall, or in autumn, since we are in Europe,” he added.

“The ECB played it safe today,” commented analyst Holger Schmieding of Berenberg bank, although Draghi “sounded slightly more confident.”

Policymakers are keen to avoid spooking markets with talk of withdrawing their stimulus measures. Draghi offered a glowing picture of the eurozone recovery and hinted at adjusting policy at a central banking conference in Sintra, Portugal, in late June.

Coming soon after another gesture towards “tapering” at that month’s monetary policy meeting in Tallinn, the comments prompted the euro to strengthen against the dollar and government bond yields to rise. The euro was up more than 1% near 2030 GMT at $1.163.

Equities were mixed, with Paris finishing lower and Frankfurt flat after both markets lost momentum with the euro’s rally. In the US, the Nasdaq eked out a record for a third straight session, while the Dow and S&P 500 both retreated from all-time highs set Wednesday.

If those trends continued, they could sap growth in the single currency area and undermine the slow progress towards the inflation target.

So the ECB hastily sought to clarify Draghi’s words and limit market reactions, following up with Thursday’s soothing tone.

Eurozone prices grew by 1.3% in June—well short of the ECB target—while central bank forecasts include inflation of 1.5% this year and just 1.3% in 2018.

 

 

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