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Draghi Does Not Hint at Change in ECB Policy


The European economy is contracting, but its central bank president seems optimistic.

Draghi's initial remarks seem fairly optimistic for a central bank in which that the economy it is overseeing is contracting. He noted improvement in sentiment and some greater financial integration.

The point on financial integration is important. This is partly the transmission mechanism that prompted the Outright Market Transaction scheme in the first place. It is also partly the increased foreign participation in the Spanish and Italian bond markets. More broadly, this is the improvement in financial conditions, declining yields in the periphery, rising equity markets, and the gradual return of depositors. It is also the improved current account balances, which is also reflected in Target2 imbalances.

The decision today, unlike in December, was unanimous. That is, in December, many wanted to cut rates although no rates were cut. Today no one favored reducing rates.

We would take away from Draghi's comments that the bar to another rate cut is higher than seemed to be the case last month. This is reflected in both the implied forward rates and in the euro moving above $1.3150. We look for a retest on the $1.33 high seen in mid-December and again at the start of the year. If improved financial conditions do not lead to improvement in the real economy, rate cut expectations may return, but this now seems like a Q2 potential, not a Q1 potential.

See more from Marc Chandler at his blog Marc to Market.

Twitter: @marcmakingsense
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