By Francesco Canepa
| SINTRA, Portugal
SINTRA, Portugal European Central Bank President Mario Draghi intended to signal tolerance for a period of weaker inflation, not an imminent policy tightening, when his comments sent the euro higher this week, sources familiar with Draghi's thinking said on Wednesday.Draghi's intention was to set up September as the earliest the bank would discuss rolling back stimulus, they said, but stressed it was by no means certain that it would come to a decision then. "The market failed to take note of the caveats in Draghi's speech," one of the sources said.Draghi's comments on Tuesday, taken as a hawkish swing, sent the euro and bond yields sharply higher.The sources said Draghi wanted to acknowledge the recent, strong economic data and prepare the market for a possible autumn decision on the future of the ECB's 2.3 trillion euros bond-buying programme but without making any commitment.He also wanted to note that the ECB will not automatically ease policy due to the current slowdown in inflation, which is seen at 1.2 percent in June and is expected to hover around that level next year.Instead, the central bank is prepared to let prices take longer to reach its target of just under 2 percent, even after more than four years of inflation misses.
But the speech was full of caveats, which also imply that the ECB is still ready to ease policy if financing conditions tighten as a result, for example, of a stronger euro or higher yields in the United States or Europe, the sources, who spoke on condition of anonymity said.Traders took the comments as a signal the ECB was gearing up to wind down the programme as early as January, an outcome that officials said had yet to be discussed and will ultimately depend on inflation and other economic data in the coming months.TANTRUM?
Some commentators even wondered whether Draghi had sparked a "taper-tantrum" on financial markets like his U.S. counterpart of the time, Ben Bernanke, did in 2013 by hinting at a reduction in the Federal Reserve's own quantitative easing programme.At the time, the Fed was forced to do a U-turn and the scheme was not reduced until the following year. This time may be different, however.The officials were adamant that the current slowdown in euro zone inflation was due to excess supply pushing down the price of crude, a boost for the oil-importing bloc.
They stressed the difference from 2014-15, when the lower inflation was accompanied by signs of a general economic malaise, but cautioned they were watching out for any sign that the drop in oil was affecting other prices and wages. An oil price fall would boost growth so weaker inflation would be beneficial as long as they do not impact long term inflation expectations and hold back wage growth, they added.This meant the ECB does not plan to ramp up its stimulus programme in response to the current inflation slowdown but it is in no hurry to end it either.The Governing Council will have August flash inflation data and its own updated projections at the September meeting."My takeaway from the Draghi speech is that a decision in September is possible but not certain," one of the sources said. (Editing by Jeremy Gaunt/Mark John)
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Published Date: Jun 28, 2017 10:00 pm | Updated Date: Jun 28, 2017 10:00 pm