On Thursday 13 September, after the board meeting of the European Central Bank (ECB), one of the journalists asked whether the 'output gap' in the euro zone had disappeared. It was a fine attempt to elicit an explosive statement from Mario Draghi, the president of the ECB.
That innocent-sounding question got to the heart of the matter. The 'output gap' is the difference between actual economic growth and the economic growth that can be achieved if all resources are deployed (without overheating). Economists also call the latter growth rate the potential growth of an economy.
Is the actual growth lower than the potential growth, then it concerns a negative output gap. In other words: growth potential remains untapped in the economy. If actual growth is higher than potential growth, the economy is running so fast that smoke is forming under the hood. If we translate this into monetary policy, the central bank must accelerate in the first case and hit the brakes in the second.
Draghi did not answer
If Draghi thought that the output gap in the Euroland had disappeared (due to growth in recent years) or will disappear soon (due to possible growth in 2018, 2019 or 2020), he would in fact be saying that the ECB would have to take quite hard action quite quickly. have to hit the brakes. That in turn would immediately have a hugely strong effect on the financial markets; think of the interest rates or the value of the euro.
However, Draghi is cunning and therefore did not answer that question directly. He only said that we have been seeing growth rates in the eurozone that are above potential growth for some time. That could mean anything. It could mean that the output gap has indeed almost disappeared, but it could also mean that this process still has a long way to go. So meaningless? Well, not exactly.
His answer implies that the output gap is closing. There may still be a long way to go, but the direction is clear. And that tells me that the ECB has no intention of doing so the plans (regarding its monetary policy).
ECB therefore sticks to plans
Draghi regularly emphasizes the strong economy, the broad-based growth and the downplayed messages. The CEO sounded much more like a hawk than usual; a central banker who tends towards a tighter rather than a looser interest rate policy. The ECB's plans to stop buying government and corporate bonds at the end of this year and to raise official interest rates in the autumn of 2019 at the earliest remain unchanged. As a result, the euro-dollar rate to almost 1,17.
It looks like it will take a lot to prevent the ECB from stopping the purchase of government bonds by December 31, 2018. The bank decided on September 13 to halve its purchasing from €30 billion to €15 billion per month from next month, it is the first step towards a complete phase-out.
Normalize the interest rate?
However, there is nothing in the press conference to indicate that the first interest rate increase in years could come sooner than the fall of 2019. In fact, normalizing interest rates may take longer than I thought. Good news for everyone affected by EURIBOR rates, but bad news for Europeans with a savings account.