MarketWatch First Take: Mario Draghi delivers master class in jawboning the market
Nobody jawbones like Mario Draghi.
Jawboning is a crucial skill for central bankers, with investors and traders hanging on every word and looking out for the most arcane change in language for a clue to what actions the central bank will—or won’t—take.
Look at the confusion surrounding the Fed’s intentions following its September policy meeting for a reminder of what happens when policy makers offer mixed messages.
Hardly anyone expected the European Central Bank president to deliver more stimulus Thursday as policy makers met in Malta. And he didn’t. But he still managed to offer up much more than market participants had expected, dropping the biggest hint possible that more action is likely on the way when policy makers next gather on Dec. 3. See: ECB live blog recap: Mario Draghi hints more stimulus to come.
Here are the main takeaways:
• The ECB will “re-examine” its stimulus program in December: “Reexamine” was the word ECB watchers were listening for, taking it as a clue that policy makers would look at either expanding the size of its 60 billion-euro-a-month asset-buying program or extend its duration past its September 2016 end date—or both.
• If that wasn’t enough, Draghi emphasized that the asset-buying program offered a lot of “flexibility”—further driving home that policy makers have plenty of ways to tweak it.
• Finally, he made clear that even the already negative deposit rate was in play. It could be cut further, a move the ECB had appeared to previously rule out. Lowering the deposit rate would effectively increase the number of bonds eligible to be purchased by the ECB.
The performance sent the euro EURUSD, -1.4992% skidding, European bond yields tumbling and stocks, including U.S. equities, on the rise. While Draghi takes pains to emphasize that the euro exchange rate isn’t a “policy target,” it’s widely believed that a weaker currency is a primary goal of the ECB’s stimulus efforts.
The market reaction was all in a day’s work for Draghi, who can arguably be credited with saving the euro with his 2012 pledge to do “whatever it takes” to preserve the shared currency. That pledge was backed up with the creation of an emergency bond-buying program that was never actually used.
Now, the ECB is in the midst of a different asset-purchase exercise. The fear heading into the meeting was that Draghi would be unable to deliver more stimulus and would struggle to sound sufficiently dovish.
If so, the risk was that the euro would rise, putting a potentially significant crimp on eurozone growth and further weighing on well below target inflation.
Critics will argue that the ECB remains far too sluggish. The ECB dithered in launching its QE program, which got started in March, and is wasting time by not acting now, they contend.
But Draghi can’t act alone. He must deal with a contentious crew of policy makers made up largely of national central banks. By making a further stimulus move sound nearly inevitable, he puts pressure on reluctant policy makers to get out of the way or risk a violent market reaction should the ECB disappoint come next month.
“Even though market participants should know from recent experiences with the Fed that crucial and groundbreaking decisions can be postponed more often than markets believe, it will be hard for the ECB not to deliver anything in December,” said Carsten Brzeski, economist at ING Bank in Brussels.