Merler, S. (2014) “Super Mario: 1up? – the ECB cuts the three reference rates and introduces a private asset purchase programme“, Bruegel Think Tank, 05 September.
The stake at this month’s meeting of the ECB’s Governing Council was exceptionally high. Mario Draghi himself raised the bar of expectations, with his intervention at Jackson Hole. That speech marked a significant change in his language, on a number of important dimensions. The risk that the Governing Council would not endorse this shift was not to be underestimated ex ante, with all the implications of betraying expectations at their height. Eventually, Super-Mario delivered.
Language and assessment
A first important point in Draghi’s press conference is the confirmation of a major change in the ECB’s language over both inflation and the economic outlook.
Concerning inflation, at the press conference in August the official line was still that “inflation expectations for the euro area over the medium to long term continue to be firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2%.” At Jackson Hole, Draghi’s language was markedly different. He explicitly acknowledged the growing risks that inflation expectations could dis-anchor: “financial markets have indicated that inflation expectations exhibited significant declines at all horizons. (…) if we go to shorter and medium-term horizons the revisions have been even more significant.”
At yesterday’s press conference, the shift in confidence became part of the official language. The ECB president said that the inflation outlook worsened in August and that during the month the ECB had seen “downward movement in all indicators of inflation expectations, across all maturities”. The 5y/5y swap rate – ECB’s preferred measure for inflation expectations – backed up after the Jackson Hole speech but other measures did not, scaring the Governing Council.
Relevant posts:
- Magnus, G. (2014) “The ECB and Sisyphus: it won’t be finished unless it does QE“, Pieria Online, 09 June.
- Varoufakis, Y. (2014) “How should the ECB enact Quantitative Easing? A proposal“, Thoughts for the post-2008 World Blog, 19 May.
- Levy, M. (2014) “ECB: An appropriate monetary policy“, VoxEU Organisation, 16 May.