Market tantrum convinces ECB to not even discuss tighter policy

FRANKFURT — The European Central Bank left its ultra easy monetary policy unchanged on Thursday and did not even discuss clawing back stimulus, suggesting it may delay an inevitable decision on tapering bond buys until the latest possible moment.

Maintaining a pledge to extend or even increase debt purchases if needed, ECB President Mario Draghi said the bank did not even go so far as to ask staff committees to prepare options for tweaking stimulus. Policymakers would revisit the topic only in the autumn, he said.

Having been burned by a mini tantrum in financial markets last month when he raised the prospect of policy tightening, Draghi was careful to give away as few hints as possible about the bank’s next move, emphasizing the need for patience and persistence to raise inflation back to target.

“We were unanimous in communicating no change to the forward guidance and also we were also unanimous in setting no precise date for when to discuss changes,” Draghi told a news conference. “We simply said that our discussions should take place in the fall.”

“We need to be persistent and patient because we aren’t there yet, and prudent,” Draghi said.

The benign tone, coming just weeks after Draghi said better growth would provide the ECB room to tighten policy to keep the broad level of accommodation, was seen as trying to delay an inevitable decision on asset buys, now set to run until the end of the year.

Those comments in the Portuguese mountain town of Sintra doubled German 10-year yields and sent the euro more than 3 percent higher, raising fears that the ECB could undo its own work by moving too early.

“Draghi clearly wanted to put the Sintra dogs back on the leash,” ING economist Carsten Brzeski said. “It was an attempt to force a calm summer in financial markets by stopping and even rewinding latest taper speculations.”

Economists prior to Thursday predicted a decision on the quantitative easing (QE) program in September but Draghi’s comments make October a more likely option with December now also put in play.

Not tasking staff committees may be a significant sign as many major policy changes in recent years have been preceded by the announcement of such work.

The euro rose to its highest level in nearly two years but bond yields dropped a touch and the premium investors demand for holding euro zone periphery government bonds over top-rated German peers narrowed.

“In fact, Draghi seems to allow for the possibility that the decision on how to extend QE will not be announced in September, and the exact details may follow later –- 26 October, or even 14 December,” Marchel Alexandrovich, an economist at Jefferies said.


With the euro zone economy now growing for the 17th straight quarter, its best run since before the 2007-08 global financial crisis, the ECB is growing more confident with the outlook, supporting Draghi’s suggestion of easing off the accelerator after printing nearly 2 trillion euros to jump start growth.

But the prospect of reduced monetary stimulus is keeping financial markets edgy, with investors sifting through clues to gauge how big central banks around the globe will unwind unconventional policy that have kept borrowing costs at rock bottom.

The biggest headache for the ECB may be the apparent disconnect between inflation and growth.

Having bought trillions of euros worth of government and corporate debt for years, the ECB has rekindled growth and the euro zone is creating jobs faster than expected.

But wage growth remains anemic, keeping a lid on inflation, which is likely to undershoot the ECB’s target of almost 2 percent at least through 2019. This suggests that easy monetary policy will have to continue for years to come.

Draghi argued on Thursday that while wage dynamics have indeed changed in the decade since the start of the crisis, these are temporary so rather than changing tools or targets, the ECB just needed patience.

Policymakers told Reuters earlier that they would not want to put an end date on the buys or a schedule on tapering, maintaining flexibility and avoiding a perception that it was on a preset course.

©Thomson Reuters

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