Draghi conveys “business as usual” message but explains why

After the European Central Bank left its record loose policy unchanged, President Mario Draghi met the press amid mounting economic pressure on the euro-zone. While Draghi talked about intensified work towards QE (including hiring a consultant), expectations haven’t changed. Moderate growth and higher inflation in the future are still foreseen. Later on, Draghi listed the reasons of why the fundamentals support a weaker EUR/USD and that began happening. 

Here is a live blog of the event.

Update: EUR/USD falls after Draghi explains why it should do so

Highlights

• Moderate recovery to continue
• Recent weak inflation not unexpected, due to energy.
• Inflation will pick up later on.
• TLTRO to see sizable pickup of 450-850 billion euros.
• Seriously working on ABS and hiring a consultant.
• Geopolitical risks has increased
• Draghi brings a more lax attitude to the exchange rate.
• But later: Fundamentals for a weaker exchange rate are in place. Draghi explains why EUR/USD should fall.
• EUR/USD finishes the press conference just below the opening rate.

Live blog

• 12:15 GMT The press conference begins at 12:30. All times are GMT.
• 12:15 You can watch the press conference live here.
• 12:15 At the same time, the US will release the weekly jobless claims. 305K is expected. Follow the release on the forex calendar.
• 12:15 EUR/USD is depressed under 1.34 towards the publication.
• 12:17 EUR/USD now sliding below 1.3370. The cycle low is 1.3332, just above support at 1.3325.
• 12:18 Earlier in the day, we had weak industrial output from Germany and the news about Russia sanctioning food imports from the EU, the US and other countries.
• 12:21 No new forecasts are released. They will be released in September.
• 12:22 EUR/USD nearly reached 1.40 in May, when Draghi hinted of action in June.
• 12:23 In June, the ECB introduced a cut in the interest rate, a negative deposit rate and announced targeted loans called TLTRO that will begin in September.
• 12:24 The ECB is now facing the “deflation monster”.
• 12:25 Next year, the ECB will hold meetings only every 6 weeks.
• 12:28 The press conference from the ECB headquarters in Frankfurt begins soon.
• 12:30 Press conference begins
• 12:30 US jobless claims at 289K – good news for the US
• 12:31 Moderate recovery
• 12:31 TLTRO to enhance policy stance.
• 12:32 We have intensified QE related work – EUR/USD slides
• 12:33 Governing council unanimous in using unconventional instruments.
• 12:34 Strongly determined to safeguard price stability.
• 12:34 GDP rose +0.2%. Q2 indicators have been volatile due to technical factors.
• 12:35 Domestic demand should be supported later on. Positive contribution from measures.
• 12:36 Improving global demand should support export
• 12:37 Risks remain on the downside: geopolitical risk could affect negatively the economic conditions.
• 12:38 Inflation was lower due to lower energy price inflation.
• 12:38 Inflation expectations remain firmly anchored. EUR/USD stabilizes.
• 12:38 Exchange rate is mentioned but not critical.
• 12:39 Subdued lending activity.
• 12:39 External demand by outside investors continues.
• 12:40 Lending to non-financial corporations remains weak. Still some deleveraging.
• 12:40 Some signs of stabilization in loans.
• 12:41 Banks reported an increase in loan demand. Some good news?
• 12:41 Banks should take full advantage of ECB loans.
• 12:41 Draghi reiterates that reforms should be enacted.
• 12:42 Fiscal consolidation should be done in a growth friendly manner.
• 12:43 Questions begin
• 12:43 A question about TLTRO and Ukraine crisis.
• 12:43 TLTRO will create a significant expansion in credit as this is funding to the real economy.
• 12:44 Expecting a sizable pickup.
• 12:44 Indications that TLTROs will happen at the right time.
• 12:45 Geopolitical risk increased: Iraq, Gaza, Syria, Libya, Ukraine.
• 12:46 EUR/USD rises back up towards 1.3380 as we have no new message from Draghi.
• 12:47 Draghi asked about geopolitics.
• 12:48 Risks come from the price of energy.
• 12:49 Intensified preparations on the ABS (QE). “I would only add that we are continuing the work regardless of regulatory changes”.
• 12:50 Hiring a consultant to help design such a program.
• 12:51 The work we are doing is in expectations that we take action. So, QE is still seriously on the agenda.
• 12:52 Draghi not surprised by 0.4% inflation – mostly due to energy.
• 12:53 However, inflation expectations for the medium and long term remain firmly anchored – this is the main message – EUR/USD rises towards 1.34.
• 12:55 Differences between soft data and hard data.
• 12:56 The recovery remains weak, fragile and uneven
• 12:57 Uneven part of recovery has become more interesting: pretty clear that countries that countries that have taken structural reforms are performing better.
• 12:58 Signs that are “less bad” in loans. The decrease in lending is smaller and smaller.
• 13:00 For the first time, we are seeing a rise in demand for loans, says Draghi. That might be the reason for his tranquility.
• 13:01 ECB not alone in overestimating inflation.
• 13:02 From 2012, the exchange rate has a strong impact.
• 13:03 ECB acted within its mandate.
• 13:04 Structural reforms are important.
• 13:05 Question about Italian GDP.
• 13:06 IS the ECB ready for deflation?
• 13:07 Low GDP figure for Italy is due to low private investment
• 13:08 Low level of private investment in general, less than in the US.
• 13:09 Expected demand but also reforms are to blame – general uncertainty due to the lack of reforms. This discourages investment.
• 13:10 It takes investors and young businesses too much time to get going.
• 13:11 Such reforms have an immediate benefit.
• 13:12 Monetary policy announcements of June have been successful
• 13:12 Since May, OIS declined by 43 basis points, Euribor by 13 points, excess liquidity has been stable, etc.
• 13:12 Fundamentals for a weaker exchange rate are in place.
• 13:13 Slowing net trade surplus, decline in inflows, decrease in euro shorts.
• 13:13 Markets have perceived that Fed and ECB policies are on a diverging path.
• 13:14 Interest rates will stay lower in the euro-area much longer than for the United States.
• 13:15 Draghi talks like a forex analyst and EUR/USD slides.
• 13:16 QE could include private and public assets.
• 13:17 Tough question about BES in Portugal. Draghi only says that the authorities took swift action.
• 13:18 The episode has been kept contained. Draghi puts light on the positive side of things: the quick resolution rather the lack of sight beforehand.
• 13:19 If geopolitical risks materialize, we will have weaker growth.
• 13:21 Reforms are critical – countries with more reforms can weather such a storm.
• 13:22 Q: Will we see more fragmentation in the euro-zone? The reporter singles out France in relation to lack of reforms.
• 13:23 Draghi says it is complicated. He cannot deny that France is on his list…
• 13:24 Not the ECB business is to determine wages.
• 13:25 On countries with deflation: is it a short or long term affair?
• 13:26 Long time: self fulfilling expectations for falling prices causing the postponement of consumption. We are not seeing it yet.
• 13:27 Entire sector could be annihilated. New sector must emerge.
• 13:28 “I listed before why the fundamentals for a weaker exchange rate are in place”.
• 13:29 Fresh forecasts confirm our outlook
• 13:30 In a sense, ABS is just a name. Previous ABS had many “imperfections”.
• 13:31 Our effort isn’t simple.
• 13:32 Last question: BES. There was no public money involved.
• 13:35 Banks have been raising a significant amount of capital in the past year.
• 13:36 Draghi goes on to explain the measures regarding banks.
• 13:37 He signs off by wishing happy holidays. The press conference has ended.

Background

While there are some green shoots of looser lending conditions from some banks in the euro-zone and the EUR/USD did drop from the previous meeting, the economic indicators are dire. This includes inflation, but not only inflation. Other clouds are also darkening.

Here are Draghi’s 4 main headaches:

1. Even lower inflation: a new 5 year low of 0.4%.
2. Slowing growth: Italy in recession, German industry wobbling.
3. Banking worries: The banking issues in Portugal’s BES deteriorated quickly. Can the ECB prevent a potentially bigger crisis?
4. Russian sanctions: The fresh ban on food imports this weighs on both growth and on inflation, as the euro-zone could suffer from excessive supply of food.

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