In its latest press release, the ECB did not announce any change to its monetary policy course. In June, the economic risk assessment was adjusted and a change to the forward guidance for key interest rate expectations was made. There was speculation in the run up to the latest meeting that the ECB would rule out any further expansion to the purchase programme. This would have been an additional restrictive signal, but the central bank could not bring itself to go through with this measure. Nevertheless, it remains an option to communicate an exit strategy from the programme. Market players and the ECB are both aware that the purchase programme will reach its limits at the beginning of next year under the current parameters.
Draghi defended the expansionary monetary policy course, pointing to the sustained low level of inflation. He claimed that as long as the improved economic outlook is not reflected in higher rates of inflation, the expansionary monetary policy would be justified. Low inflation figures are causing regular headaches for central bankers because there is still no indication that a sustained upwards trend is on the horizon. The ECB’s response to this situation is to continue to remain patient and circumspect, which actually sounds like they are a little lost. Draghi himself mentioned during his press conference that the traditional mechanisms between refinancing conditions, growth and inflation are currently not in synch as was previously the case. However, the ECB is said to be convinced that the normal relations will be reestablished – they just don’t know when. The ECB is therefore hoping and keeping the monetary policy accelerator pressed. Draghi has therefore extinguished the expectations of an imminent change in course which were raised in the wake of his speech in Sintra. In fact, all he has done is to indicate that discussions will be held in the autumn regarding monetary policy – although he dropped no hint as to what the result of these discussions might be.
Draghi’s next important speech will be during the Fed’s meeting at Jackson Hole from 24 to 26 August. Three years ago, Draghi announced the current bond buying programme to the markets at the same place. The cautious comments from Draghi’s press conference indicate that the central bank wants to avoid another tumultuous period on the markets. One gets the impression that the ECB is fearful that market expectations could become detached from reality. An excessive yield increase is to be avoided at all costs. The pattern of “dovish” ECB meetings with brasher statements in between, with the aim of slowly preparing the markets for the end of the purchase programmes, could well continue.