Shweta Singh provides analysis of Mario Draghi’s speech at Sintra on 18t June.
A meaningful fiscal stimulus in the Eurozone, and especially in Germany, continues to be elusive. We have long argued that in the absence of a fiscal boost, monetary policy is pushing on a string. This is further evident in the rapid fall in inflation expectations which likely reflects the market’s perception that the central bank does not have enough ammo to fight low inflation and/or is willing to tolerate low inflation for longer. But ECB President, Mario Draghi, challenged this view in his speech in Sintra last week.
His speech has changed the market’s perception about ECB policy. He reiterated that risks are tilted to the downside and said, in the absence of an improvement, the ECB target would struggle to meet its mandate, meaning new stimulus would be required. He emphasised that various policy options were on the table, including enhancing the forward guidance, further interest rate cuts, a tiering of deposit rates and re-starting the bond-buying scheme. Crucially on QE, he noted that the central bank still has ‘considerable headroom’ and that the limits on the tools are specific to the contingencies the ECB faces, opening the door to tweaks to the self-imposed constraints on QE.
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