Draghi Dialing Down the Drama May Mark Wane of Monetary Activism
Central bankers might be becoming a little more sanguine about the limits to their powers.
Take European Central Bank President Mario Draghi, who on Thursday talked up the effectiveness of his institution’s stimulus policies to date, but damped expectations that he’ll load up with fresh asset-buying soon. His only new announcement after again downgrading euro-area growth forecasts was that officials will look into how to ensure the current program overcomes a worsening scarcity of bonds.
Even with the scheduled end of the 1.7 trillion-euro ($1.9 trillion) plan just six months away, Draghi said policy makers meeting in Frankfurt haven’t yet discussed what they’ll do when that day comes. If a new laissez-faire tone is creeping in to replace years of hyperactivity, it may be a signal that the division of labor between central banks and governments in providing economic support is shifting.
“Draghi doesn’t sound like a central banker who’s in any hurry to ease further,” said Tim Graf, head of European macro strategy at State Street in London. His stance “fits in with the G-20 statements about using all actors to support growth, including the fiscal side. Taking ever-easier monetary policy for granted is becoming less valid.”
As a communications tack, Draghi’s performance after the Governing Council met to set euro-area monetary policy is comparable with the attitude a day earlier by Mark Carney. The Bank of England governor told lawmakers that his institution’s rapid response after the U.K. voted to quit the European Union probably staved off a recession, but also said the BOE isn’t “trigger-happy.”
In other words: Emphasize how effective monetary policy has been, talk less about what it still can do.
Leaders and finance chiefs from the world’s top economies seem to agree. They’ve spent much of this year, under China’s G-20 presidency, saying they want governments to do more and central banks less. Draghi read at length from the communique issued at this month’s leaders’ meeting in Hangzhou. There are even nascent signs that the fiscal purse strings are being loosened a little.
Still, bond investors were disappointed, with prices sliding after he spoke. Francesco Papadia, a former ECB director general, remarked on Twitter that Draghi’s “ambiguity” on prolonging QE may have been needed to placate more hawkish members of the Governing Council.
While the ECB “seems to be in no hurry to go wild and decide on new bold measures,” vagueness now doesn’t preclude surprise action later, according to Carsten Brzeski, chief economist at ING-DiBa in Frankfurt.
Central bankers remain adamant that their actions work. Carney said the BOE had “without a shadow of a doubt” reduced the likelihood of an economic contraction through a rate cut and renewed asset buying, and that he’s “serene” about the central bank’s conduct. Draghi expressed satisfaction that the current stimulus-boosted recovery is “firmer, more robust than other recoveries we’ve seen in the past.”
But nor are they ready to start new adventures in monetary stimulus. The BOE head opposes negative rates, and neither man has shown any enthusiasm for helicopter money or a radical expansion into asset classes such as equities.
Draghi said the “main thing” was to make sure QE can be implemented “in the new constellation of interest rates.” Officials are likely to focus on how to avoid getting snarled up in their own existing rules about which bonds they can buy — such as a stipulation that the yield on securities for purchase can’t be below the deposit rate of minus 0.4 percent. That limit currently disqualifies the equivalent of $1.87 trillion of euro-area government debt from QE.
The relative inaction “looks disconnected from past experiences when the ECB used to react to” any revisions to the economic outlook, Frederic Pretet, a rates strategist at Scotiabank Europe in Paris. “This is striking when we remember that, not so long ago, the ECB president stressed the need to bring back inflation back to target without undue delay.”