Eurozone: ECB rates on hold but Draghi hints at further easing in Jackson Hole speech
August 4, 2014
At the annual Jackson Hole symposium hosted by the Kansas City Federal Reserve on 21–23 August, European Central Bank (ECB) president Mario Draghi’s speech provided interesting insight for monetary policy developments in the coming months. Draghi acknowledged that financial market gauges of inflation expectations for both the short and long run are pointing downward and are not consistent with the inflation rate picking up to the target level of “below, but close to, 2%” any time soon. He added that “[the] Governing Council will acknowledge these developments and within its mandate will use all the available instruments needed to ensure price stability over the medium term.”
According to analysts, the phrasing of the statement suggests that the ECB may adopt further monetary easing—and likely outright purchases of public or private sector assets—as early as its next meeting on 4 September. In previous statements, Draghi did in fact declare that a deterioration in the medium-term inflation outlook would provide a justification to launch a quantitative easing program.
In addition, Draghi called for fiscal policy having a stronger role in boosting demand and addressing high unemployment in the Euro area. He stated that, "It would be helpful for the overall stance of policy if fiscal policy could play a greater role alongside monetary policy.” Countries should support demand with fiscal accommodation, while at the same time implementing the necessary structural reforms. Moreover, Draghi called for stronger coordination in terms of fiscal policy among Euro area members. Overall, analysts believe that Draghi’s speech signaled a distancing from the austerity focus that had dominated the Eurozone’s economic policy agenda in recent years.
At its most recent meeting on 7 August, the ECB left the main refinancing rate unchanged at a record-low of 0.15% in a decision that market analysts had expected. The ECB also left all of the other main interest rates unchanged. In particular, the Bank left the deposit rate—the rate banks receive for parking funds at the ECB—in negative territory at minus 0.10%.
Author: Armando Ciccarelli, Head of Data Solutions