Draghi Answers Questions about ECB Meeting

By Michael Antuono, International Business Writer

Mario Draghi was forced to face the media Thursday to answer questions following the European Central Bank’s (ECB) first meeting of the New Year. After previously announcing to extend their bond buying program, many were curious about the future of Eurozone monetary policy following positive strides in economic data.

It appears that the ECB is in no rush to loosen the reigns on their quantitative easing policy. They will stand pat on their decision to scale back bond purchases from €80 billion a month to €60 billion. This reflects their previously held sentiment that economic activity is strengthening in the Eurozone and less help from the central bank will be needed to maintain growth. Mr. Draghi is open, however, to increasing purchases again if conditions deteriorate.

Eurozone inflation  reached 1.1 percent in December after hovering near 0 percent earlier this year. Some economists believe that this number could reach 1.8 percent by February, which would be nearing the 2 percent inflation target set by the Central Bank.

The real point of contention, however, is in Germany where inflation rose to 1.7 percent in December; this outpaced most expectations, and had consequently raised fears of an overheating economy. With Mario Draghi’s decision to stand pat on the ECB’s current course of action, some Germans are worried about the future. In response to their fears of inflation picking up and the economy overheating, he attributed rising prices largely to energy costs, rather than core consumer goods.

Mr. Draghi’s requirements for shifting ECB policy have finally been illuminated. He emphasized that the rise in inflation needed to be “durable” and “self-sustained.” Gains in energy alone are not enough to satisfy these criterion. Perhaps more importantly, he stated that these gains needed to be reflected across the entirety of the Eurozone, not just in a few of its members. He referenced the early period of the euro, when subdued prices in Germany resulting from economic reform were carried by higher inflation elsewhere. Germany may run hot now, but it will not overheat.

Overall, the ECB has been clear – they are going nowhere fast. Their predetermined policy will run its course. Their bond buying should at least continue through the end of 2017, and beyond if necessary. They will be tapering their quantitative easing slightly, but are open to adjustments as they arise from changes in new economic data. The necessity of a high bar to adjust policy is so that growth can be manageable and self-sustained, without reliance on Central Bank help. Low rates now will ensure higher rates in the future.

Mr. Draghi was also asked multiple times to comment on President Trump’s remarks about the difficulty of maintaining the Eurozone and the US Dollars inflated cost, but stated only that it was too early to judge Trump’s policies.

However, between Trump’s likely policy proposals and a more hawkish Federal Reserve, currently penciling in three rate hikes for 2017 versus one rate hike in each of 2015 and 2016, we could see a weakening euro in the near future, as capital leaves the EU and comes to America to take advantage of the higher interest rates. The driver for the exchange rate between the currency pair lies primarily on the US side, however, and not with the ECB and their eurozone decisions.

Interestingly enough, there was an avoidance of discussing Brexit, contributing towards an unclear meaning.

A version of this article appeared in the Tuesday, January 24th print edition.

Contact Michael at

michael.antuono@student.shu.edu

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