Draghi provides glimpse into ECB kitchen

Their speeches and participation in discussion panels provided an additional insight into the ECB kitchen. As so often, the news was mainly found in the innocent-sounding subordinate clauses.

Increase official interest
For example, the Draghi reiterated that the condition for the ECB to raise official interest rates is that inflation in the eurozone convincingly climbs towards 2%. The bank's target is an annual inflation rate of 2%.

While that was nothing new, he added that while the trend is now upwards, inflation is "reliant heavily on a very accommodative monetary policy." In line with this, Draghi said that the rise in inflation is not yet sufficient to act. The bank must also be of the opinion that inflation will remain just below 2% (in the medium term).

This is important because it means that interest rates will only have to go up (significantly) when the ECB is convinced that inflation will rise sufficiently in the medium term (about 2 years ahead). In addition, the bank must be of the opinion that it will not fall back if the interest rate is increased. That's why quarterly inflation estimates are so important (the next edition will be out in June).

Increase slowly
By contrast, the ECB will be anything but in a rush to raise interest rates and when the bank starts to do so, it will be slow. It is also underlined that Draghi indicated during the conference that there is great uncertainty about the further course of inflation. This is code for: "We're not going to do crazy things and don't want to risk intervening too early."

In short, interest rate hikes by the bank in Frankfurt will not start until well after the end of the purchase program for government and corporate bonds. And when the bank then starts to raise interest rates, it will do so in small steps and long intervals.

Reduce monetary stimulus
In that regard, it was also interesting to hear that Draghi said he would be careful not to let "premature expectations of a first rate hike" lower the degree of monetary stimulus. In short: "We at the ECB do not think it is fair that due to unjustified expectations in the market we will raise interest rates earlier than expected." 

Basically what Draghi said is that if analysts start to expect the ECB to raise interest rates earlier than in the summer of 2019, they are really wrong. These words also indicate that the ECB will prefer to be late with the rate hikes.

It takes a while
In concrete terms, it means that we have to expect that the ECB will stop buying government and corporate bonds between September and the end of 2018 (not exactly, because the bank will continue to buy that paper even after the formal end), in order to do so at some point at the end of the year. to raise official interest rates in the second quarter of 2019. By 0,25 percentage point to keep it unchanged for at least a few months.