Although this comes as absolutely no surprise considering Mario Draghi’s comments in Sintra and subsequent communications, the minutes of the ECB’s June meetingshow a willingness to reengage on the accommodation front in the face of mounting uncertainty.
On June 18, Draghi served notice that despite the market’s lukewarm reception to his press conference earlier in the month, the ECB will indeed deploy more stimulus if that’s what it takes.
“The prolongation of risks has weighed on exports and in particular on manufacturing. In the absence of improvement, such that the sustained return of inflation to our aim is threatened, additional stimulus will be required”, he said in June 18, in Portugal.
That set in motion a reinvigorated hunt for yield as bonds surged, and, perhaps even more notably, it irritated Donald Trump, who took to Twitter to exclaim that “Mario D.” was giving Europe a competitive advantage by promising more easing while the Fed played the “stubborn child” (to quote the president).
Europe is, of course, on the front lines of the global economic downturn. The manufacturing slump in Germany is especially pernicious (underscored this week by BASF”s kitchen-sink profit warning) and Italy’s ongoing fiscal soap opera is a microcosm of what you can expect to play out across western democracies going forward, as populist politics (both on the left and right) collide with fiscal constraints.
In the June minutes, the ECB explicitly says the central bank is prepared to cut rates and restart the QE engine. To wit:
It should stand ready to ease the monetary policy stance further by adjusting all of its instruments, as appropriate, to achieve the ECB’s price stability objective. Possible measures could include extending forward guidance further, restarting net asset purchases and decreasing policy rates.
So, get ready for another easing package, because it’s coming. The minutes also underscore that the risks are skewed asymmetrically to the downside. Here’s that passage:
The balance of risks remained tilted to the downside, despite the downward revision to the growth projections, largely on account of persistent sources of uncertainty relating to the international environment. These uncertainties could weaken or delay the recovery in external demand beyond what was already reflected in the June projections and further weigh on investment and consumption. Trade tensions had re-escalated, uncertainty about Brexit was extended in time and fragilities in emerging market economies remained, despite signs of stabilisation in some of them.
You’ll recall that the EU cut its outlook for European growth in 2020 and for inflation this year and next on Wednesday, providing more cover for the central bank, in case that was necessary.
It seems likely that by the time Christine Lagarde takes the reins at the ECB, a new easing program will either be in place or else in the process of being implemented. The only question is how she’ll sell it going forward.
(Original article by Heisenberg)