Right from the start of Mr. Draghi’s
opening remarks at yesterday’s Monetary Policy Statement and press conference
in the ECB headquarters in Frankfurt, the Single Currency started to fall, and
this continued for the remainder of the trading session. The ECB has revised down
its inflation rate estimates for the coming years, and also its expectations of
economic growth. In light of this, it stands ready to do more if the current
program of Quantitative Easing, which will run its course, does not result in a
lift to inflation.
The ECB has also increased the
percentage of any sovereign bond issuance that it can buy under the program,
from 25% to 33%. This will not result in more QE, but will ‘smooth’ the process
of continuing what has already been embarked upon.
Mr. Draghi said that they expect
inflation to go negative in the coming months, due to low oil prices, but that
this is expected (hoped?) to be a transitory phenomenon.
An
inflation conundrum
One thing that emerged from the
question and answer session was an illustration of the way the ECB views inflation,
or price stability as it calls it. Firstly, under its mandate from the EU, it
is its only concern. The bank has no role to play in job creation or in
managing a rise or fall in the value of the currency, unlike other central
banks. Most surprising to this writer was the statement by the President that
it was headline inflation, rather than core inflation, which informs ECB policy
decisions. The surprise here lies in the fact that core inflation has the cost
of energy removed from its calculations. And core inflation is rising. In the
meantime, lower energy costs feed through into the pockets of consumers and the
profits of businesses, and so, one might be tempted to think, should be seen as
a good thing. Mr. Draghi did temper his remarks on
this subject by saying that the bank was “aware” of the way core inflation was
going. We might just hear more about this matter in the future.
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