Draghi Signals ECB in No Rush to Tighten Monetary Policy Soon
Comment of the Day

February 27 2013

Commentary by David Fuller

Draghi Signals ECB in No Rush to Tighten Monetary Policy Soon

This statement, reported by Bloomberg, helped to steady stock markets today. Here is the opening
European Central Bank President Mario Draghi signaled the bank has no intention of tighteningmonetary policy anytime soon with inflation projected to undershoot its 2 percent target next year.

While the ECB's balance sheet may shrink naturally as confidence returns to financial markets and banks repay emergency loans, policy makers are "far" from considering an exit from monetary stimulus, Draghi said at an event in Munich today. "We foresee for next year an inflation rate which is significantly lower than 2 percent."

The ECB has cut its benchmark interest rate to a record low of 0.75 percent, extended over 1 trillion euros ($1.3 trillion) in cheap loans to banks and pledged to buy the bonds of debt- strapped nations if they agree to economic reforms. The ECB in December forecast the 17-nation euro economy will contract 0.3 percent this year and inflation will slow to 1.4 percent in 2014. It is due to update the forecasts next week.

While conditions on financial markets are improving, Draghi said the euro-area economy is still "weak" and the ECB's accommodative policy will help to drive a "gradual recovery" in the course of 2013.

"There is still much uncertainty" and "it is clearly too early to pull the carpet as risks are still to the downside," said Thomas Costerg, an economist at Standard Chartered Bank in London. At the same time, "we cannot ignore that there seems to be growing underlying accommodation fatigue among central bankers," he said.

David Fuller's view The catalyst for this, and similar calming statements from Mr Bernanke, was Wall Street's sharp reaction on Monday. These two leading central bankers are keen to maintain and eventually solidify the fragile improvement in confidence that we have seen since last November.

If they succeed, and there is a reasonable chance that they will, this pause by stock markets will look more like a reaction and consolidation phase than some of the sharp sell-offs that we have seen in recent years.

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