Draghi: ECB Has Tools to Fight Higher Inflation

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The ECB has left the interest rate unchanged at 1%, as expected. In the accompanying press conference, Mario Draghi lifted inflation expectations and says the ECB has tools to fight inflation. This hawkishness pushed the euro higher, but the overall outlook remains gloomy and the euro eventually slides.

Questions about Greece continue. Given his past appearances, he might slip, intentionally or not, some interesting comments that rock the markets. Live blog.

Highlights

  • Signs of stabilization in the euro-zone.
  • Growth forecasts slightly downgraded.
  • Inflation forecasts significantly upgraded for 2012, because of oil and indirect taxes.
  • ECB has tools to fight inflation – EUR/USD higher.
  • LTROs were an “unquestionable success”.
  • Draghi passes the ball to the governments’ and banks’ court.
  • As the press conference continues, EUR/USD is sliding back.

Live Blog

13:03 GMT. All times are GMT. Presser begins at 13:30. EUR/USD at 1.3250.

13:10 EUR/USD rose nicely earlier as hopes became higher for a successful PSI. There’s lots of disinformation on behalf of all sides. The results are planned to be released on Friday at 6:00 GMT.

13:16 Also note the US jobless claims published at 13:30 GMT. They are expected to show little change and remain around 350K. This is another small hint towards the Non-Farm Payrolls tomorrow. Here’s how to trade the NFP with EUR/USD.

13:28 EUR/USD at 1.3240. You can watch the presser here.

13:29 There is a report that the German government is planning emergency meetings if PSI fails.

13:30 US jobless claims rose to 362K, a bit disappointing, but not dramatic. Press conference to begin soon.

13:34 Draghi begins. EUR/USD at 1.3238.

13:35 Signs of stabilization in the euro area. Downside risks remain, with upside risks to inflation, because of oil.

13:36 Draghi repeats ECB mandate for 2% inflation or below. He moves to LTRO.

13:37 LTRO due to “exceptional situation”. Draghi praises the success of the first operation and believes that the second operation will push lending activity.

13:38 Tools to fight inflation still available. Rate hike hints? EUR/USD at 1.3260.

13:39 The ECB has downgraded growth forecasts, and there are downside risks. This is due to debt markets and spillover to real economy. EUR/USD softer.

13:40 Energy prices and indirect taxes push inflation higher. Inflation should fall below 2% in 2013.

13:41 Inflation forecasts upgraded, especially for 2012. He repeats oil and indirect taxes. On the other hand, weak economic activity slows inflation.

13:44 Governments are making progress regarding fiscal consolidation.

13:47 Questions begin: Will we see LTRO 3? What do you say about German criticism? Answer: LTRO 1 and 2 are an unquestionable success.

13:48 The markets are now moving again, after LTRO.

13:50 Relationship with Jens Weidmann is excellent. Nobody is isolated in the ECB. “I really cherish the price stability culture of the Bundesbank”.

13:51 He says that he’s certain that Bundesbank president Weidmann didn’t leak the letter to the press.

13:52 “We are all in the same boat” – criticizes criticism from the outside.

13:54 No comment on Greek PSI.

13:55 “For the first time, M3 has declined for 3 consecutive months” – he says this in an alarming tone, and says that things are improving thanks to LTRO.

13:56 Confident that the fiscal compact will be improved in Ireland.

13:57 WSJ reporter – 1. Where will growth come from? 2. Will meeting minutes be released?

13:58 Draghi answers by quoting an article of the reporter regarding the balance sheet. He argues with that article instead of answering the questions. He concludes that the risks are not higher for the ECB.

14:00 Growth will be very very gradual. EUR/USD stabilizing under 1.3250.

14:02 Regarding transparency: “The ECB is very transparent” – press conferences, hearings in parliaments, publications. “We think we are transparent”.

14:03 We want to separate the nationality of the members from the statements. It’s an ongoing discussion.

14:04 I think we are doing the right thing with monetary policy.

14:05 Euro is stronger since the LTROs – rejects criticism about a “currency war”.

14:06 LTRO was a unanimous decision. It’s not Germany against the others. Isolation is not the way of the ECB, “at least not me”.

14:08 Draghi notes rising unemployment as a risk factor. The ECB didn’t discuss rate changes today.

14:09 Both LTROs had a powerful and complex effect. “We need to see how the landscape has changed”.

14:10 We have done the LTROs, and now we want to see the full effect. As expected.

14:12 Oil prices could continue rising – this is part of the geopolitical risk.

14:15 The ECB staff knows how to manage risks, regarding the SMP. The SMP has been inactive.

14:17 Draghi passes the ball to the governments’ court (and also the bank).

14:19 Juergen Stark also voted for the LTRO.

14:20 Difference between the LTROs: the second had more participants. German banks took less money, but had more participants.

14:21 The money is now closer to smaller businesses, closer to the real economy.

14:22 EUR/USD is now heading lower, under 1.3230.

14:23 “To have a Plan B is to admit defeat” – Denial is nice…

14:25 What about the firewall? Drgahi mentions decisions by the European Council. He sounds confident.

14:26 Regarding the markets and the Greek PSI, Draghi says markets are doing better, but refuses to answer.

14:27 Confident that the fiscal compact will pass.

14:32 There was an environment of a heightened risk aversion.

14:34 Q: Rates for Germany might be too low. Draghi doesn’t really answer.

14:35 Are collateral rules to loose? Answer: They could be even more loose…

14:37 Question: What about Portugal? Draghi and Constancio say things are going well, and that Greece is unique. “The program is on track”.

14:40 Greek bond exchange was right. This is taxpayers money.

14:43 One of the reasons for higher commodity prices is monetary policy by other banks (Fed’s QE?). Things were better then.

14:45 Rise in commodity prices began before LTROs.

14:47 “I don’t want to think about” a case that the Irish don’t approve the fiscal compact.

14:48 Press conference ends. EUR/USD at 1.3232.

— Updates coming —

Background

Inflation is still above target, and the European officials currently see only a mild recession. Regarding the debt crisis, the two LTROs are seen as a big success by the ECB and by markets. This can absorb Greek shocks. The ECB is likely to wait and see before making another operation like this.

See more in the ECB preview.

It’s balance sheet is already bigger than that of the Federal Reserve, and the quality of its holdings is questionable.

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About Author

Yohay Elam – Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I’ve accumulated. After taking a short course about forex. Like many forex traders, I’ve earned the significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I’ve worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.