No good excuses for the decline in inflation, says Draghi
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ECB chief Mario Draghi gave a big speech at Jackson Hole, Wyoming on Friday.
There were two big ideas to come out of the speech:
• The first is that the ECB will do more to halt falling inflation.
• The other is that the ECB probably can’t do it on its own, and that the destructive effects of austerity (fiscal policy outside the direct control of the ECB) need to be reversed somehow.
In a series of off-the-cuff remarks, Draghi went much further than before to acknowledge there were no good excuses for the decline in inflation and inflation expectations (Euro-area inflation slowed to 0.4% this month, a fraction of the ECB’s goal of just under 2%); acknowledging a significant real deterioration that can’t just be explained by some temporary problems, like the situation in Ukraine or food prices.
Stocks rose, the euro fell and bond yields dropped to record lows on Monday as the comments fanned speculation the ECB is finally heading for a form of monetary stimulus it has long avoided.
Draghi previously said that a worsening of the medium-term inflation outlook would provide a reason for broad-based asset purchases. Investors’ attention will be on the Eurozone inflation data out this Friday, consensus expects a further contraction to 0.3%, from 0.4% in the prior month.
The ECB has already announced a list of easing measures in June, including a targeted long-term financing operation (TLTRO); under this the euro-zone central bank will give euro-zone banks access to up to EUR850bn worth of cheap loans. Against this backdrop, it is widely believed that the ECB will not provide any additional QE stimulus at its meeting next week on the 4th September.
As such, TLTRO usage will be under greater scrutiny. The first TLTRO operation is scheduled for September 18th, with policy makers scheduled to lend banks as much as 400 billion euros in the first stage of a funding program tied to real-economy loans. Officials are also “fast moving forward” with a program for buying asset-backed securities, and meanwhile the euro area should also benefit from a weaker currency.
James Bevan is chief investment officer of CCLA, specialist fund manager for charities and the public sector. CCLA launched The Public Sector Deposit Fund in 2011 to meet the needs of local authorities and other public sector organisations. You can follow James on twitter @jamesbevan_ccla
