Wolf Richter wolfstreet.com, www.amazon.com/author/wolfrichter
Draghi’s shenanigans get hilarious, months before his term ends.
So here’s ECB President Mario Draghi, whose term ends in October, and he’s at the ECB Forum in Portugal, and in a speech on Tuesday titled innocuously, “Twenty Years of the ECB’s monetary policy” – so this wasn’t a press conference after an ECB policy meeting or anything, but a speech on history at an ECB Forum – he suddenly threw out a whole bunch of stuff…
How, “in the absence of improvement” of inflation, “additional stimulus will be required,” in form of “further cuts in policy interest rates” and additional bond purchases, and how “in the coming weeks, the Governing Council will deliberate how our instruments can be adapted commensurate to the severity of the risk to price stability,” and that “all these options were raised and discussed at our last meeting.”
Whoa! Wait a minute, said the good folks who were part of the ECB’s June meeting. These options were not discussed, they told Reuters on Tuesday.
Draghi had ventured out there on his own – apparently trying to push his colleagues into a corner single-handedly as his last hurrah.
His vision laid out on Tuesday was quite a change from the June 6 post-meeting announcement, which didn’t mention anything about even discussing rate cuts. It said that the ECB expects its policy rates to “remain at their present levels at least through the first half of 2020,” before the ECB would begin to raise them, with the bias still on raising rates, not cutting rates. That was less than two weeks ago, and there had not been another ECB policy meeting since then.
Interviewing six “sources” at the ECB with “direct knowledge of the situation,” Reuters found that these policy makers “had not expected such a strong message and that there was no consensus on the path ahead.”
At the June 6 policy meeting, any possibility of a rate cut or renewed asset purchases had been mentioned “only in passing” and without any substantive discussion. The discussion had instead focused on the new package of loans for the banks, the sources said.
The sources told Reuters that ECB policymakers were worried “Draghi was flagging his measures so strongly to markets as a ‘fait accompli’ that there would be no chance for them to disagree with them in at the next policy meeting on July 25,” Reuters reported.
“But they added that, with a global trade war escalating and financial worries around Italy already high, there was little appetite for a fight in July,” Reuters said.
Several sources told Reuters that, because very little new economic information on the Eurozone will come out before the July 25 meeting, “it would be difficult to justify coming to a different policy conclusion than in June.”
And at the June meeting, the conclusion was to delay rate hikes – and there was no mention of rate cuts.
The sources told Reuters that the debate about which policy measures to implement, when, and in what order was still wide open, with policy makers having very different opinions.
For some the first step should be a change in the ECB’s policy message. Others favor a reinforcement of the pledge not to raise rates for a longer time.
Others favor restarting the asset purchase program to bring borrowing costs down for governments so that they could spend more during a downturn, though that would be handicapped by the “issuer limit” that prevents the ECB from holding more than 30% of a country’s sovereign bonds. But the ECB could dispose or circumvent that limit, “some” sources said.
Some policymakers lean toward rate cuts, the sources said. And other policymakers think the ECB should not make any changes at all unless economic data deteriorated substantially and inflation expectations dropped further below the ECB’s target.
But there was no consensus, and there had been no substantive discussions of these topics at the last meeting that had focused on the modalities of the new bank loan package.
What is hilarious is how Draghi was outed as a fabricator and schemer on the very same day he made his additional-stimulus-will-be-required speech, by people who were surprised by his speech, some of whom felt “powerless,” as Reuters put it, and knew he was trying to box them into a corner with his devious move. This has the smell of a palace revolt at the ECB against the head honcho and his last hurrah.