Draghi wants to continue printing money for Euro zone

ECB chairman Mario Draghi wants to continue printing money for Euro zone, ForexSQ experts say the European central bank chairman leaves interest rates unchanged, Read all about Mario Draghi speech at today.

Mario Draghi Speech March 2017

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After years of record-breaking efforts by the European Central Bank, inflation has finally come back to the eurozone.

The ECB’s governing council will meet on Thursday knowing that inflation has slightly overshot the bank’s goal of just under 2 per cent — for the first time since early 2013.

Is it a case of job done? Not quite.

Mario Draghi, ECB president, is likely to insist that core inflation, which excludes energy and food price rises, remains weak at 0.9 per cent.

But he is facing pressure from the council’s hawks, who want him to rein in the ECB’s asset purchase programme. In making their case, they cite the jump in the headline inflation rate and predictions of further rises to come.

Dropping the doom and gloom

The ECB president’s opening statement to the press, expected at 1.30pm GMT, will be followed more closely than usual — because of the intensifying debate with the hawks on the council.

Mr Draghi plans to persist with the schedule of the ECB’s quantitative easing programme of €780bn in bond purchases this year while keeping interest rates at record lows and standing ready to do more if necessary.

In recent months he has used his opening statement to say that, if the economy worsens, the ECB could cut rates further or increase the rate of bond buying beyond the current €60bn a month.

Until now, those remarks have not mentioned the conditions for pulling back support, conditions that Mr Draghi dubs a “high-class problem” that the weak eurozone recovery does not yet face.

But, with price pressures rising and the recovery broadening, the hawks believe that the time has come for the president to drop the doom and gloom.

Yves Mersch, a member of the executive board, wants Mr Draghi to ditch his customary reference to the bank’s readiness to cut rates should the economy slow down.

Jens Weidmann, president of Germany’s Bundesbank, will push for Mr Draghi to commit in his opening remarks to doing less should the outlook brighten more quickly than expected.

Sabine Lautenschläger, another member of the executive board, is likely to join forces with the two hawks.


Mr Draghi’s opening statement will also include new forecasts by regional central bankers for growth and inflation in the single currency area.

Current quarterly projections, issued in December, forecast inflation of 1.3 per cent in 2017, 1.5 per cent in 2018 and 1.7 per cent in 2019.

Mr Weidmann let slip last week that the inflation forecast for this year could be revised about half a percentage point upwards. But he acknowledged that the inflation forecasts for 2018 and 2019 were likely to be relatively unchanged.

This matters: central bankers set policy based on what they think will happen to inflation in the medium term. A bigger number for inflation in 2019 is much more important than a rise in the estimate for this year.

Major changes to the growth outlook are not expected. In December, economists predicted a robust 1.7 per cent expansion in 2017 and 1.6 per cent for both 2018 and 2019.

High German inflation

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The ECB has long struggled with its image in Germany. The public perception in the country is that, by keeping borrowing costs ultra low and providing plentiful supplies of cheap credit, Mr Draghi has enabled profligate EU member states to avoid painful but necessary structural reforms. According to this view, those paying the price are German savers who have seen their wealth eroded by negative interest rates.

High-profile German politicians and economists are among the most vocal proponents of rate rises — one of the big reasons why the return of inflation in the country poses a particular problem for the bank.

At 2.2 per cent, German inflation is slightly higher than for the rest of the eurozone.

Mr Draghi’s response is likely to focus on the lack of evidence of broader price pressures. In January, he set out four criteria for when the central bank needed to act against inflation. He said the ECB would be concerned by price pressures that: affected the medium and not just the short term; were durable; were “self sustained” and not just down to the ECB’s ultra-loose monetary policy; and affected the whole of the eurozone.

None of his four criteria have been met so far.

Limits to QE

The economic improvements in the eurozone have snuffed out most calls for more QE. But concerns are still felt that the ECB could run into trouble should it need to extend QE beyond the end of this year.

Signs are becoming evident that, because of the programme’s design, the ECB is running short of assets it can buy in places such as Portugal. The current rules for QE forbid the purchase of a third of a country’s debt, or more than a third of any specific government bond.

“Our analysis suggests that the rules it has set itself for the purchase of sovereign debt leave the ECB with no other choice but to taper purchases of government bonds further beginning early in 2018,” said Andrew Bosomworth, head of Pimco portfolio management in Germany.

“In fact, we think it will have to cease buying central government sovereign bonds in some smaller countries altogether in the first quarter of 2018 if it is to respect both the 33 per cent issuer and issue limits.”

Mr Draghi may not get to grips with the problem today. But he knows it is an issue he cannot leave to the last moment, FT says.

Draghi Speech live today March 2017

If you want to see Mario Draghi live speech today at March 2017 you can see it on Youtube here.

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