Mario Draghi stole the headlines overnight delivering ‘another small but important shift in ECB rhetoric’

Photo: Getty/Ralph Orlowski

ECB president Mario Draghi is the talking point of markets this morning.

After years of extraordinary monetary stimulus designed to help boost growth and inflationary pressures, it appears that the ECB is preparing markets for a reversal of those measures, and perhaps sooner than many thought.

Here’s the key line from his speech overnight which sent the euro soaring and bond yields — not only in Europe but also around the world — screeching higher.

“As the economy continues to recover, a constant policy stance will become more accommodative, and the central bank can accompany the recovery by adjusting the parameters of its policy instruments — not in order to tighten the policy stance, but to keep it broadly unchanged,” he said.

Gavin Friend, senior market strategist at the National Australia Bank (NAB) in London, called Draghi’s speech is “another small but important shift in ECB rhetoric”, adding that it reflects the ECB’s “increasing confidence”.

“As the economy gathers momentum, the ECB will adjust its policy parameters in sync to ensure things like financial conditions remain broadly the same,” says Friend.

“Today’s communication marks the latest in an incremental approach to removing the emergency policy measures, which as we have argued will see the ECB outline a tapering of its asset purchase program (APP) at its early September meeting.”

However, given the distinct shift in commentary from Draghi not only overnight but earlier this month, Friend suggests an outline on potentially reversing emergency policy settings may now come sooner than what he and the markets currently expect.

“Today’s commentary now makes it a closer call on whether the ECB will use its next meeting on 20 July to flag up the September meeting as a rendezvous for some guidance on a tapering of its APP,” Friend says.

We’ve said we suspect the ECB can wait until December to flush out the finer details on a tapering program for 2018, but officials have argued recently that investors won’t have to wait until December to get the broad outline.

“It will be interesting to watch whether speculation of an earlier communication rises between now and 20 July meeting.”

Draghi’s speech can be accessed at the ECB website here.