Thursday, September 5, 2013

No Change in ECB Policy
In his prepared remarks at today’s ECB press conference, ECB President Mario Draghi reiterated the ultra-easy forward guidance first provided in July:
Looking ahead, our monetary policy stance will remain accommodative for as long as necessary, in line with the forward guidance provided in July. The Governing Council confirms that it expects the key ECB interest rates to remain at present or lower levels for an extended period of time. This expectation continues to be based on an unchanged overall subdued outlook for inflation extending into the medium term, given the broad-based weakness in the economy and subdued monetary dynamics.
During the Q&A session, Draghi was asked about the geopolitical risks posed by the crisis in Syria. He responded as follows:
We certainly are alert to the geopolitical risk that may come out of the Syrian situation and to the economic risk that may derive from the emerging market situation, which are two different things, really. At this point, I should say something I should have said before. As you can observe, when we look at the nature or the composition of the beginning of a recovery, I am very, very cautious about the recovery. I cannot share any enthusiasm. It is just the beginning. Let us see – these shoots are still very, very green. One thing I should have said is that, for the first time in about two years, it is domestic demand that is at the root of this recovery. It is still coupled with exports, but it is domestic demand. That is very important because if it continues, it gives a sense that the dependence of the recovery on the rest of the world is somewhat balanced by domestic demand. Secondly, we certainly stand ready to act. I did say this when I was asked about what we would do if interest rate or money market developments were unwarranted in view of our assessment of medium-term price stability. We certainly stand ready to act, whichever source these developments may derive from. I have commented on that before. We have not yet discussed any coordinated action, but we have periodic exchanges anyway. One of them will be this weekend in Basel. There will be an opportunity for a meeting with the central banks of major countries.
When asked about the ECB forward guidance policy, he said:
There are two types of forward guidance: one is qualitative and the other one is quantitative, with precise state conditions. Ours is the first type. So, all in all, the Governing Council is fairly united – unanimous, actually – on the wish to maintain this type of forward guidance. I have previously mentioned the BIS paper which actually compares the results and levels of success of different types of forward guidance. As I have said before, the ECB does not score too badly. It scores very well on having controlled volatility and reduced the uncertainty within the corridor and it scores ok in controlling the levels of rates.
Finally, Draghi was asked to explain why his OMT policy has been so successful even though it has yet to be actually implemented. Here is his response in full:
Well, it’s very hard to answer this question without flattering oneself! But I suspect that the design of this measure has made it both powerful and credible. It’s powerful because it addresses a realistic objective, namely redenomination risk spreads – the spreads that are derived from redenomination risks. It’s credible because it is accompanied by conditionality. In our present situation (and in many others, I suspect), a commitment to buy an infinite amount of bonds in order to keep interest rates at a certain level is often not credible – besides being illegal in our present situation. So, I think this combination of a realistic target, accompanied by what are in principle unlimited means (but are, in fact, limited by the market’s size) and by conditionality, has made this measure very effective without it needing to be activated. But conditionality is an important ingredient, because it says that once this measure is activated, the country that is on the receiving end will actually be undertaking a series of actions – budgetary consolidation or structural reforms, or both – that will have the effect of increasing the value of the bonds issued by that country, the value of the very bonds that the ECB is buying into it. So, the conditionality, if properly activated, produces an increase in the value – if you want to use that word – of the collateral that the country posts in exchange for ECB action. I think that’s one way to look at this. Thanks for asking!

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