Draghi’s 2018 compromise: enough money printing to revive inflation and check euro ascent

European Central Bank Press Conference in Frankfurt am Main, Germany- 7 September 2017. ECB President Mario Draghi (on the left) and Vítor Constâncio, ECB Vice-President walk to the Press Conference room.( ECB audiovisual services. Some rights reserved).

Last Thursday Mario Draghi, the President of the European Central Bank, reassured the Eurozone banking conglomerates they will continue being blessed with zero cost money, well into the foreseeable future. He stated, “one thing is clear; the bottom line is that interest rates will stay, as it’s written here, at the present levels (zero for main refinancing operations) for an extended period of time and well past the horizon of our net asset purchases”. In short, Draghi reassured the bankers in the most serene and affirmative manner, that in the medium term they will go on pocketing a large part of the wealth the rest of the economy produces. All Eurozone bankers must have rejoiced at this.

Apart from that, Draghi said the October ECB Governing Council will decide about the future of central bank’s monetary policy, most probably ready to taper the extraordinarily expansionary monetary measures. Presently, the ECB prints and distributes €60 billion a month, through purchases of bonds held by Eurozone commercial banks. Officially, this policy expires in December; however the ECB has to inform in advance the markets about its intentions, under the ‘forward guidance’ principle.

Forward guidance for bankers

Under this light, the ECB is expected to announce in October its intensions to apply a tighter monetary policy. During the past few months, the money markets have been discounting this future policy change and consequently the euro has markedly appreciated with the dollar. Actually, last Thursday, after Draghi confirmed the ECB is to reset its monetary policy in October, the money market catapulted the euro above the 1.20 benchmark with the dollar, the highest level for two and a half years. The euro has gained more than 14% this year in comparison to the American money.

Yet, the core mandate of the ECB doesn’t relate to targets like the euro parity or economic growth or even unemployment. The Eurozone central bank is solely authorized to pursue price stability and take the necessary measures to bring inflation close but below to 2%. Now, the strengthening of the euro makes the prices of imports cheaper and as a result it further suppresses headline inflation. To be reminded, during the past seven years, the ECB has being trying to revive the dying inflation rate, which was found by Eurostat at 1.5% in August.

Stronger euro

The strengthening of the euro though undermines ECB’S efforts to bring inflation close to 2%, and Draghi said that “the recent volatility in the exchange rate represents a source of uncertainty which requires monitoring with regard to its possible implications for the medium-term outlook for price stability”. In short, the Governing Council is deeply concerned about the visible negative effects on inflation, from a rising euro.

Understandably, the single currency will continue appreciating, if the central bank tapers its extraordinary monetary policy, by reducing or even zeroing the monthly €60 billion it injects into the financial system. Under the present expansionary pact, the ECB has infused into the economy €2 trillion during the past two years.

Is more needed?

The continuation of the same strategy though and the complete deferring of tapering may gravely distort the entire economy. Continued stocky money injections are to create bubbles in markets like the real estate and public borrowing, or lead the entire financial system to dangerous “excessive optimism, leverage, and maturity transformation”. The American central bank has stopped printing and circulating new dollars since November 2016, on similar hazards. Undoubtedly, then, the ECB is to taper next month, but the question is how much? Let’s dig on that.

All and every financial market expects that the ECB is to reset its policy lines in October. Last Thursday, the euro reached a two and a half year high after Draghi said, “the bulk of these decisions will be taken in October”. The fact that he set a precise time point to announce the new policy lines, indirectly created a certainty in markets, that the ECB will surely change something as from January next year, towards the orthodox side. Not to forget, the ECB is obliged to caution the markets in advance about its intended major policy changes, under the ‘forward guidance’ principle.

A tradition of compromise

However, if one paid careful attention to what Draghi said last Thursday, one can come to conclusions about the broad lines of the new 2018 ECB policy. For one thing, interest rates will remain unchanged and the Eurozone banks will continue being favored by zero refinancing interest rates. As for the monthly injections of newly printed euro, they will be reduced but not much below today’s level of €60bn. To revitalize inflation and achieve the target, enough new printed money is needed. Draghi hinted at this when he said, “Now, the other topic we discussed was basically the calibration of our policy instruments starting with next year”. This certainly means there will be a compromise between an inevitably stronger euro, a development which will result even from the smallest tapering, and of course the targeting of increased inflation.

The President of ECB in his introductory remarks clarified his intentions on that field by saying “Therefore, a very substantial degree of monetary accommodation is still needed for underlying inflation pressures to gradually build up and support headline inflation developments in the medium term”. In other words, in 2018 the monthly money printing will be rather close to the currently €60bn a month, in order to help inflation rise, while keeping the euro appreciation at bay. A too strong euro could further distress all the deficitary Eurozone countries, including France, and Draghi won’t allow that to happen.

 

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

the European Sting Milestones

Featured Stings

These campaigners want to give a quarter of the UK back to nature

How to build a more resilient and inclusive global system

Stopping antimicrobial resistance would cost just USD 2 per person a year

The world’s e-waste is a huge problem. It’s also a golden opportunity

Is it true that the G20 wants to arrest tax evasion of multinationals?

Climate change is a security threat. We must act now

Youth Entrepreneurship Issue of the month: JEN, organisers of JADE October Meeting, on why JEs should come together

Anti-vaccination scaremongering: What should we know about anti-vaccine argument?

Connectivity and collaboration in the ICT industry: the key to socio-economic development

We can’t rid Asia of natural disasters. But we can prepare for them

A bad marriage can be as unhealthy as smoking and drinking

Multiculturalism, social diversity and tolerance

France and Germany can’t reach consensus regarding EU’s top jobs

This is why mountains matter more than you think

Why is the World Health Organisation so much needed?

Syrian Government’s ‘different understanding’ of UN role, a ‘very serious challenge’ – Special Envoy

Human rights: breaches in Russia, the Rakhine State and Bahrain

3 ways to fight stress at work

What UK and EU risk if Brexit “wins” these elections

Human rights breaches in Hong Kong, Russia and at the US-Mexican border

UN, world leaders, condemn Sri Lanka terrorist attacks targeting churches, hotels, which leave more than 200 dead

Monday’s Daily Brief: Independent UN experts on Myanmar, UN chief renounces attacks in US, Libyan airport violence, UN spokesperson on Kashmir, and FAO and Italy on development

Artificial Intelligence and Machine Learning: “Am I a real Boy?”

Cleantech innovation is being stifled. Here’s how to unlock it

Tunisia wants to change inheritance rules to boost gender equality

Resisting EU budget cuts

Italy solves the enigma of growth with fiscal consolidation: The Banking Union

Norway initiates WTO dispute complaint against US steel, aluminium duties

This is what Belgium’s traffic-choked capital is doing about emissions

ILO: Unemployment to increase by 8.1 million in 2013-2014

Tuesday’s Daily Brief: hate speech, dementia, Libya and Yemen, human rights in Brazil and Lebanon

Implementation of tax transparency initiative delivering concrete and impressive results

The next talent opportunity for the digital workplace? Neurodiversity

MWC 2016 LIVE: Industry looks to reduce mobile gender gap

What cryptocurrencies will do to the integrity of politics

How to create responsible supply chains in the age of globalization 4.0

G20 LIVE: “Our response needs to be robust…otherwise we will only find the fire we are trying to put out”, UN Secretary General Ban Ki-moon just lit up G20 in Antalya Turkey

Member States agree to Commission proposal to support Irish beef producers impacted by market uncertainty

Darfur: Inter-communal tensions still high despite improved security, Mission head tells Security Council

5 facts you should know about the world’s refugees

UN must bring more women police officers into the fold to be effective – UN peacekeeping official

Antitrust: Commission imposes binding obligations on Gazprom to enable free flow of gas at competitive prices in Central and Eastern European gas markets

This Japanese TV show about work-life balance is a big hit – here’s why

The new North America trade deal USMCA punishes German cars

It’s time for financial services to embrace the Fourth Industrial Revolution. Here’s why

Traditional knowledge at ‘core’ of indigenous heritage, and ‘must be protected’, says UN Forum

UN rushes to deliver aid as key Yemeni port city is ‘shelled and bombarded’

NEC @ European Business Summit 2014: The Digitally Enabled Grid

INTERVIEW: Poverty, education and inclusion top new General Assembly President’s priority list

Eurozone: How can 200 banks find €400 billion?

A sterilised EMU may lead to a break up of Eurozone

More ‘political commitment’ needed urgently for HIV prevention: UNAIDS chief

Overseas investment falling, developing countries largely unscathed: UN trade agency

INTERVIEW: ‘Defend the people, not the States’, says outgoing UN human rights chief

Ebola fight ongoing amid evidence of ‘several massacres’ in DR Congo’s Ituri province

Four lessons for a successful switch to value-based healthcare

Data capture, not disclosure, is the way to meet our climate goals

Ahead of State of the Union the European Youth Forum highlights lack of action on youth employment

How populist and xenophobic movements in the EU tear apart European businesses and startups

On Google antitrust case: “Let’s face it, some companies want to hurt Google and it goes as simple as that”

This is the state of the world’s health, in numbers

UN court increases sentence of former Bosnian-Serb leader to life imprisonment

EU makes key TTIP document public as protests get louder

More Stings?

Comments

  1. From a side it looks like ECB is just doing experiment with EU economy and watching for results.But in a fact they are concentrating EU administrative economic control power in few elite bankers hand. ECB council directly related with global banks as Citi group, Goldman Sachs, Deutsche bank and etc. Who can deny these relations?? Another big economic crack is Deutsche bank which is a tool for ECB to do nowadays monetary politics. I am just waiting for another controlled crisis. As always real wealth from EU citizens will be shrank again, statistical economic standards for EU citizens will be reduced. And national elected governments will can’t do anything as they will be controlled by ECB through debt control. ECB is trying to take over most of EU members debts, ECB probably soon will try to increase threshold of debt ownership from 1/3 to 50+%….

Trackbacks

  1. […] Draghi’s 2018 compromise: enough money printing to revive inflation and check euro ascent  The European Sting […]

  2. […] Draghi’s 2018 compromise: enough money printing to revive inflation and check euro ascent  The European Sting […]

Speak your Mind Here

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s