Draghi Sticks to the Baseline. Cites Risks from Trade, Oil Prices and Market Volatility

The European Central Bank president, Mario Draghi was speaking at the banking conference event in Portugal last week. The main take away from the speech was that the ECB president promised that the ECB would take time to hike interest rates.
FX Empire Editorial Board
Mario Draghi

The comments were in line with the ECB’s statement and press conference that was held just the week before. While officials outlined their plans to taper QE to 15 billion euro from October and ending QE by December 2018, central bank officials noted that interest rates will not change at least through summer of next year.

Speaking at the conference, Draghi said, “We will remain patient in determining the timing of the first rate rise and will take a gradual approach to adjusting policy thereafter, the path of very short-term interest rates that is implicit in the term structure of today’s money-market interest rates broadly reflects these principles.”

Draghi, however, clarified that the ECB was committed to ending its bond purchase program by the end of this year. This would mark the end of the ECB’s nearly a decade-long effort to stimulate the Eurozone economy following the financial crisis which led to a recession in the Eurozone.

Draghi also said that this didn’t mean that the ECB would withdraw its support to QE. Another official from the ECB noted that the central bank’s monetary policies will remain focused on the economic development and growth which would remain a key factor when determining the forward guidance on interest rates.

Officials maintain the timing of the interest rates remains key but that the monetary policy is also data dependent. The ECB is expected to keep its borrowing costs low at the current levels and could maintain low-interest rates even at the end of summer of 2019. They said that such a step was necessary in order to ensure that the central bank’s policies will continue to support growth and in achieving the price stability target.

Consumer prices in the Eurozone were seen to be fairly positive after recent data showed that headline inflation rose 1.9% for the first time in nearly a decade, closer to the ECB’s 2% inflation target rate. However, core inflation rate still lagged, rising just 1.1% on the year in May 2018.

While Draghi’s comments were slightly optimistic on the economy and growth, the central bank chief said that there were also increasing number of growing uncertainties, for which he said the central bank would be cautious.

Draghi cited three main sources of risk which were the increased threat of protectionist policies from the U.S. such as imposing tariffs on steel and aluminum imports. He also mentioned the risk of rising oil prices on account of increased geopolitical risks and the persistently high market volatility.

Draghi’s comments echoed views from many other central banks including the U.S. Federal Reserve which perceived the ongoing threats of tariffs on imports from other nations as being detrimental to growth.

While there has been an overall increase in the threat to global trade, the U.S. administration upped its ante earlier last week when President Trump announced that he would impose further tariffs on imports from China to about $200 billion.

While there is uncertainty on whether President Trump will follow through on his threats, officials in China are expected to draft up similar measures against the U.S. This could potentially trigger tit-for-tat responses between the U.S. and its trading partners.

Just a few weeks ago, the U.S. administration’s steel and aluminum tariffs went into effect with Canada, Mexico, and the Eurozone seeing their brief exemption periods being lapsed.

Draghi said that amid the threats, there could be risks of lower investment which could, in turn, limit the Eurozone’s economy from achieving its full potential.

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