Draghi provides ‘something for both doves and hawks’ after ECB leaves policy on hold

LONDON — The European Central Bank left monetary policy on hold at the March meeting of its Governing Council on Thursday, with President Mario Draghi providing ammunition for both dovish and hawkish market participants.

The central bank announced on Thursday that all of its key interest rates remain unchanged, along with the scale of its quantitative easing programme after the conclusion of the meeting. That means the ECB’s base interest rate stays at 0%, while its deposit rate is -0.4%.

Draghi told reporters at a press conference after the meeting that the council discussed changing the wording of its monthly statement to reflect a shift in its stance, but did not do so in the end. That change would have been indicative of a shift in policy stance towards raising rates.

Draghi’s opening remarks in the conference were predictably dovish in tone, but as he took questions from reporters he turned a little more hawkish.

“A very substantial degree of accommodation [is] still needed for underlying inflation pressures to build up and support headline inflation,” Draghi told reporters in pre-prepared remarks.

“If the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, we stand ready to increase our asset purchase programme in terms of size and/or duration,” he added, noting that the bank believes risks to growth remain “tilted to the downside.”

Draghi said that the ECB will continue to “look through” changes in headline inflation — which hit 2% in February — in favour of looking at core inflation, which remains subdued.

However, he said that the bank has “lost its sense of urgency” in terms of taking more action on monetary stimulus in future thanks to the strengthening recovery of the eurozone economy.

Commenting on the day’s action, Pantheon Macroeconomics’ Claus Vistesen said that the meeting provided “something for both hawks and doves” adding:

“Mr. Draghi remained dovish at today’s meeting, but the introductory statement included a slight change in the assessment of economic risks which are now deemed to be “less pronounced.” Today’s statement also lacked the reference to the commitment to use “all available tools” to prevent tightening financial conditions.

“Mr. Draghi said that the removal of this reference was due to “less urgency” by part of the ECB in standing ready to act against outright deflation. The hawks will use this as vindication for the priors, but we struggle to accept this.”

During the conference Draghi once again took aim at European governments, saying that structural reforms are still needed. He said: “There are signs of somewhat accelerating global recovery and increasing global trade, however economic growth is expected to be dampened by a sluggish implementation of structural reforms.”

Draghi presented a series of upward revisions to the ECB’s inflation forecasts, saying that the bank sees headline inflation averaging 1.7% in 2017, 1.6% in 2018, and 1.7% in 2019.

Addressing growing discussions of currency manipulation from countries around the world, Draghi said that efforts by nations around the world to avoid manipulation have been a “pillar of the stability that has accompanied world growth over the last 20 years or longer.” That should continue, he added.

The ECB’s current quantitative easing programme is set at €80 billion per month and is scheduled to be extended until December but at a decreased rate of €60 billion. That decision was announced at the final meeting of 2016 in December.

The euro jumped against the dollar during Draghi’s press conference after he said that the euro is “irrevocable.” Draghi said: “The euro is a channel for solidarity across some of its members.”

Here is the chart as of 2.00 p.m. GMT:

Screen Shot 2017 03 09 at 14.01.56

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