Draghi: Confidence, persistent and prudent are the main themes – AmpGFXs

Draghi’s speech yesterday was much more cautious, but had some of the same themes and it also laid the groundwork for a tapering in policy next year, according to the analysts at Amplifying Global FX Capital.

Key quotes

“Draghi said, “So for us to be assured about the return of inflation to our objective, we need persistence in our monetary policy”.  In other words, we should expect a long period to come of QE and low rates.”

“However, he also said, “We need prudence. As the economy picks up we will need to be gradual when adjusting our policy parameters, so as to ensure that our stimulus accompanies the recovery amid the lingering uncertainties.”  It’s subtle, but prudence here means we need to reduce stimulus (carefully, mindful of the risks) as the economy approaches its potential.”

“He laid the groundwork for a tapering in policy next year, saying, “As the economy continues to recover, a constant policy stance will become more accommodative, and the central bank can accompany the recovery by adjusting the parameters of its policy instruments – not in order to tighten the policy stance, but to keep it broadly unchanged.”

“Illustrating that, like Dudley, he is mindful of financial conditions, he said, “But there is an important caveat that we need to consider. Financing conditions are not only determined by the calibration of central bank instruments, but also by other market prices, some of which are significantly affected by global developments.”

“These are hardly what you would describe as hawkish comments, and yet it did appear that German bund yields led the rise in US yields on Tuesday.”

“Perhaps it is the case that the market has gotten more tuned into the evidence that central banks more generally are shifting gear, and Draghi’s comments bring the ECB into this realm as well.”

“Euro yields and the EUR exchange rate were probably also impressed by the broader sense of confidence Draghi displayed in his speech. Reiterating and placing more emphasis on the messages he delivered at the last ECB policy meeting in which the ECB removed its assessment of downside risks for the economy and said the risk of deflation had disappeared (even though it downgraded its inflation forecasts) and expressed confidence that the ECB would achieve its 2% inflation mandate in the medium term.”

“In this speech, he said, “The threat of deflation is gone and reflationary forces are at play.”  He also spoke extensively about the reasons for the slow response in inflation to the closing output gap, describing these forces as “temporary” that “should not affect medium-term price stability”.  In essence, be patient, we are more confident we will get there.”