ECB policy has become a lot more activist under the tenure of Mr. Draghi. As a result, the monthly press conference now attracts far more attention on a regular basis than in the past. In turn, Mr Draghi has taken to use the press conference to influence markets. In December, it seemed that the ECB was near a rate cut, when it digested a very downbeat economic assessment by its Staff.
At the January meeting, neither the economic nor the financial situation had really changed but Mr. Draghi saw better prospects and thus made clear that a rate cut was now off the table.
Suddenly, it seemed the glass looked half full, whereas in December it was nearly empty. A renewed twist occurred during the February meeting. Mr. Draghi chose to focus on the downside risks. Why? The euro had strengthened a lot and money market rates had gone up, effectively tightening financial condition in the euro area. As the ECB “growth” forecast was -0.3% for this year, such a “stealth” tightening of financial conditions was highly unwelcome. Mr Draghi’s comments suggested emerging concerns that recent signs of stabilisation in economic conditions could be
threatened if the firming in money market rates and/or a strengthening in the exchange rate of the euro were to go much further. Draghi added that if upward pressures on the euro were to become significant, the ECB might alter its risk assessment on inflation and growth when it publishes its new projections (at this week’s meeting). This was a thinly veiled hint the ECB might be close to the point of at least considering action to ease policy.
We elaborate on the economic and financial situation in the euro area since the February meeting and on the new staff forecasts. Thereafter we draw conclusions regarding the outcome of the meeting and the tone of the comments at the press conference. Summarizing, the ECB will keep the refi-rate unchanged and won’t announce new non-standard measures. At the press
conference, Mr. Draghi will sound dovish, re-iterating that policy will remain accommodative and ample liquidity will keep money market rates at current levels for longer.