DRAGHI SENDS CLEAR MESSAGE TO MARKETS / THE FINANCIAL TIMES COMMENT & ANALYSIS

Draghi sends clear message to markets

John Authers

 

ECB head signals that he will get what he wants — higher inflation

 

Mario Draghi got his message across this time. Maybe this was “As Much As It Takes II”. Or maybe his insistence on “monetary dominance” will find its way into the lexicon. But the bottom line for a central banker who has been adept at mastering and guiding markets’ expectations until now was clear — he is in charge, and he will get what he wants, which is higher inflation.

 

Central banking seldom sees such drama. On Thursday, Mr Draghi’s normal mastery of expectations had gone badly wrong. An expansion by his European Central Bank of easy money policies, including extending “QE” bond purchases and cutting interest rates even further below zero, was met with exactly the wrong market response. Traders had expected more, and the euro had the second strongest day against the dollar in its history, gaining more than 4 per cent in the hours after the announcement. This was exactly the opposite of what Mr Draghi had presumably hoped.

By luck, Mr Draghi was within hours on a plane to the US, where he gave a brief speech to the Economic Club of New York in a glittering lunch on Wall Street, and then submitted to questions from Lord King, the former head of the Bank of England.

Mr Draghi made perhaps the most successful verbal intervention in the history of central banking three years ago, when he promised to do “whatever it takes” to end the eurozone sovereign debt crisis. It worked. Lord King is a famed sceptic of the use of such “forward guidance” to move markets.

“Yesterday it didn’t seem to have quite the same effect,” Lord King said, to laughter. Why had the market reaction been so negative for him?

In response, Mr Draghi was defiant. This was a “recalibration”, he said, and not a “revolution”. That was what he had told people to expect. And it was “clearly not a package designed to address market expectations — it was designed to address our objective of inflation”.

As for the stories that a more radical package had foundered on German opposition, the ECB “like all central banks has some dissent”, but “if there’s anyone that’s shown that unanimity isn’t a constraint on monetary policy decisions, it’s me”.

(This brought mingled laughter and gasps from the audience. “This man hasn’t a shred of self-doubt,” commented one banker under his breath.)

As for the future, it is one of “monetary dominance”. The eurozone crisis has developed from a risk of systemic collapse to a more present danger of stagnation and deflation. While Mr Draghi did not use the phrase, he made it clear he can do whatever it takes to avert that.

 

First, there is no maximum limit on the amount the ECB can expand its balance sheet by buying bonds, if necessary. “The balance sheet of a central bank is a monetary policy instrument. It should be utilised to the extent that is necessary to achieve our mandated objective. There’s no specific limit for using this.”

Second, he said, the European Court of Justice has backed the ECB’s freedom to act. So, he said: “The conclusion is that we have the power to act, we have the determination to act, and we have the commitment to act.”

Mr Draghi is putting to the test the limits of his ability to use words to move markets. The euro dropped about 0.5 per cent against the dollar as he was speaking — a big move but still a long way from clawing back all of Thursday’s huge move. But faced with the kind of commitment Mr Draghi showed in New York, it would appear that traders should buy the euro at their peril.