Mario Draghi’s press conference did nothing to dampen speculation that the European Central Bank (ECB) will have to loosen monetary policy again before too long. The outgoing president said on Wednesday that data since the bank’s last policy meeting have confirmed that the slowdown at the end of 2018 is “extending into the current year” and that the risks to the economy remain tilted to the downside thanks to geopolitics, trade conflicts and “vulnerabilities in emerging markets.”
Draghi threw shade at U.S. President Donald Trump in particular, whose repeated threats of tariffs, he said, had contributed to the weakening of business confidence. The ECB had already laid out its basic game plan for the rest of the year last month, when it changed its forward guidance by taking a rate hike this year off the table, and by announcing a new round of long-term loans, known as TLTROs, to start in September.
But the few details it provided about the TLTROs at that time left open the question of whether they would actually loosen monetary conditions, or whether they were just intended to roll over existing access to credit to stop conditions tightening prematurely. Draghi declined repeated invitations to clear up that ambiguity on Wednesday, saying that the topic wouldn’t be discussed until the Governing Council’s next meeting in June.
“We need more information,” was the curt explanation. In the same vein, Draghi declined to give a direct answer to whether his talk of mitigating the impact of negative interest rates was—as most analysts believe—a preliminary step toward cutting the ECB's deposit rate even further from its current level of -0.4%.
By June it should be clearer whether, and how strongly and quickly, the euro zone will recover from a slowdown that still seems not to have run its course. Forward-looking indicators in the euro zone’s German engine room are still bleak: incoming orders fell 4.2% in February and the expectations component of Ifo’s business sentiment index remain close to a seven-year low despite turning up slightly in March.
“While the ECB tries to sound optimistic, it has started to prepare for the realization of the downside scenarios,” said Nordea Markets' Jan von Gerich. “We think more rate cuts remain in the tool box and more bad data would now more easily spur the market pricing of such moves.”
Draghi returned more than once to his recent theme that the ECB has enough tools at its disposal to get inflation back to target after years of undershooting. But the euro zone’s core inflation rate has been trending down for 10 years despite increasingly unorthodox steps taken to turn it around. After falling to 0.8% year-on-year in March, it stands at less than half the desired rate.
Draghi appeared to hint at the central bank letting the euro zone economy run hot by saying there was "no implicit ceiling" in its medium-term target of just below 2%. This effectively inviting inflationary forces—whether higher wage agreements or exchange rate weakness—to try their luck.
Chance would be a fine thing. But inflation remains elusive. And with the Federal Reserve only just still in hiking mode, the window for the ECB to raise interest rates in this cycle may well have shut.