The European Central Bank (ECB) met on June 6 and investors eagerly awaited what Draghi had to say. He was expected to tell more about the new support for the commercial banks (in the form of special loans) and about the bank's interest rate plans.
The ECB's interest rate plans are once again a topic of discussion, and that topic is perhaps more topical than before. This is because the central banks in Australia, India and New Zealand have lowered their interest rates. In addition, the probability increases that the Fed interest rates in the United States will fall in the near future.
The ECB also reported that it will ease its monetary policy if inflation does not rise towards the target of 2% inflation per year in the medium term (around 2 years). Estimates of inflation for the coming years, released at the same time, show that economists believe that monetary depreciation will not climb to that target until 2021.
Important figures
These estimates are very important. Not because they are always accurate, but because the ECB's job is to get inflation below (but close to) this 2%. As it takes some time for changes in monetary policy to take effect, the bottom line is that a central bank cannot respond to actual inflation developments, but only to inflation expectations. After all, changing the official interest rate no longer has any effect.
Expectations about inflation are of course very important, as are expectations about price increases that can be derived from certain prices on the financial markets. The latter measure also indicates that the market sees inflation in the eurozone well below 2% per year in the coming years.
Setbacks in growth
In addition, the ECB also indicated that the chance that economic growth will disappoint is greater than the chance that it will surprise positively. Knowing that lower economic growth often means lower inflation and it will take some time for interest rate changes to take effect, it seems likely that the ECB will ease monetary policy in the coming quarters. Another factor is that the ECB board members had called for an interest rate cut and a new round of buying government and corporate bonds.
A significant incident also took place after the press conference. One of the journalists wanted to ask a question and wondered if the ECB is also leaning towards an interest rate hike. Even before he finished his question, Draghi shouted 'no' twice. The incident underlines how committed the ECB is to reporting that it certainly has no plans to make borrowing in the eurozone more expensive. Not now and not in the years to come.