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.

 

the sting Milestone

Featured Stings

Can we feed everyone without unleashing disaster? Read on

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

Coronavirus response: over €1 billion from EU Cohesion policy to support Spain’s recovery

The hidden pandemic: mental illness

JADE Team at the European Business Summit 2017

Populist Eurosceptics helped by Trumpists seriously threaten the EU edifice

A Sting Exclusive: “Entrepreneurship in the Coronavirus (COVID-19) era” written by the Vice-President of Junior Enterprises Europe

‘Endemic’ sexual violence surging in South Sudan: UN human rights office

Eurozone governed by an obscure body and gray procedures

Climate changes and the imminent public health crises

Eurozone recession subsides

More funds needed to counter ‘persistent and multi-faceted humanitarian problems’ in Ethiopia

Cohesion Policy after 2020: preparing the future of EU investments in health

On their epic journeys, migratory birds connect nations and inspire people, UN says on World Day

Rapid action needed for people to meet challenges of changing world of work

Libya ‘in race against time’, but dissolving conflict ‘a realistic prospect’, Security Council hears

Why India can show us how to achieve growth with purpose

Opening – February plenary session, 27 new seats

Telemedicine and the Brazilian reality

This is what great leadership looks like in the digital age

UNESCO food and culture forum dishes up fresh serving of SDGs

‘True’ peace, requires standing up for human rights, says UN chief Guterres

Iran: UN rights chief ‘deeply disturbed’ by continuing executions of juvenile offenders

WhatsApp to face scrutiny from EU regulators task force over data sharing with Facebook

Tuesday’s Daily Brief: funding for Palestine refugees, families today, tech surveillance

UN and African Union in ‘common battle’ for development and climate change financing

China is adding a London-sized electric bus fleet every five weeks

UN investigates systematic sexual violence across South Sudan

They won this year’s Nobel for economics. Here’s why their work matters

Living to 100: why we should plan for more sushi, chocolate and work

COP22 addresses a strong global pledge to effectively implement the Paris Agreement

Restore hope that peace will come to the Middle East, UN negotiator urges Security Council

Seaweed straws and loose-leaf tea: 6 ways to reduce plastic waste

South Sudan ‘heading towards lasting peace and stability’, UN General Assembly told

3 ways activists are being targeted by cyberattacks

Facts and prejudices about work

How global tech companies can champion ethical AI

Universal Health Coverage in the EU: Are we really leaving no one behind?

Easier Schengen Visas for non-EU holiday makers: A crucial issue for south Eurozone countries

Yemen agreement to end southern power struggle ‘important step’ towards peace: UN Special Envoy

System value can power the energy transition in emerging markets

Future of Insurance Claims in Focus at Fourth Annual Connected Claims Europe Summit

The multidisciplinary team facing the multidrug resistant form of Tuberculosis in the state of Amazonas (Brazil)

Ukraine pays the price for lying between Russia and the EU

UN experts urge Turkey to repatriate Irish woman associated with terror group

We won’t win the online security war without people power

Across the world, women outlive men. This is why

A ‘system value’ approach can accelerate the energy transition. Here’s how

How tiny countries top social and economic league tables (and win at football, too)

Geopolitics and investment in emerging markets after COVID-19

The blackened white coat of the doctors

COP21 Breaking News: “There is an ecological debt that the world needs to pay back to Africa”, French President Francois Hollande promises 2 Billion euros by 2020 from Paris

Conference on Future of Europe should start “as soon as possible in autumn 2020”

Roma integration: fight social exclusion, poverty and anti-gypsyism, MEPs demand

Car rentals: EU action leads to clearer and more transparent pricing

Paradise islands of Pacific increasingly vulnerable to climate change, as UN boosts resilience

Key quotes from China’s Premier Li on COVID-19, the economy and US relations

Right2Water initiative: Is the Commission ready to listen to citizens?

Coronavirus: Commission Statement on consulting Member States on proposal to prolong and adjust State aid Temporary Framework

3 ways to stop COVID-19 from drying up start-up talent pools

UN launches ‘South-South Galaxy’ knowledge-sharing platform in Buenos Aires

Investors have a role in securing our shared digital future

More Stings?

Advertising

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