Super Mario Poised To Bow Out Of ECB With A Package Of Monetary Easing

Mario “whatever it takes” Draghi is not planning to go gently into that good night of retirement.

While he disappointed investors who expected the European Central Bank to take some action to ease monetary policy at its meeting this week, outgoing President Draghi made it clear that the ECB is readying a package of measures to announce in September.

Economic prospects are worsening, inflation below the ECB target is unacceptable, and the central bank stands ready to use its full toolkit. Draghi has made them as effective as the special powers of his videogame namesake, Super Mario.

The Full Toolkit

Measures on the table include a further lowering of the bank deposit rate from its current -0.4%, a tiered interest rate to partly shield banks with an exclusionary amount, and a relaunch of the bank’s asset purchases.

The disappointment of no action and the promise of future action combined to whipsaw European stocks and the euro, but the joint currency ended up on balance and stocks mixed.

The only concrete action Thursday was the amendment of forward guidance to include “or lower” in the statement that rates would remain at their present level through mid-2020. The guidance also added that policy will have to be accommodative “for a prolonged period of time.”

Draghi's Swansong

However, the 71-year-old Draghi did affirm that he was indeed going into partial retirement at least and was not available to take on the high-pressure post of managing the International Monetary Fund, effectively swapping jobs with Christine Lagarde, who will take over the ECB in November.

German media had reported that France was lobbying hard for Draghi in the IMF post, though it would mean altering the international lending agency’s age limit of 65. Kristalina Georgieva of Bulgaria faces a similar obstacle but both candidates would be preferable to southern Europeans than Jeroen Dijsselbloem, the former Dutch finance minister who is the current frontrunner.

Draghi has two more monetary policy meetings of the governing council before he steps down, on Sept. 12 and Oct. 10, though market participants now expect a package to be announced as a whole next month.

Still Some Opposition To Easing

Draghi hinted there was still some opposition to monetary easing on the governing council. Eurosystem committees are expected to marshal the modalities of easing by the next meeting while incoming economic data should also strengthen the case for looser policy.

The outgoing president stressed that inflation consistently below the ECB’s 2% target is unacceptable and the central bank may have to change its frame of reference so that 2% is not a cap on inflation but an average rate over the longer term, with periods of running above the target to compensate for shortfalls.

Impact on The Fed

Analysts were uncertain about the impact of the ECB’s inaction for the Fed’s policy meeting next week. In general, they seemed to think that the lack of measures now called into question whether the Fed would act aggressively, while the pledge to act soon might actually ease the pressure on the Fed as well.

The safest bet, of course, is that what the ECB does will make no difference to Fed policymakers, who are focused on the dynamic of the domestic economy.

In any case, sentiment is settling in that any market reaction to monetary easing will take place now, with the ECB’s pledge to act, and less so when the measures are actually announced. Any backtracking would likely bring a severely negative reaction in the markets.

The governing council also announced it has no objection to Lagarde becoming the next president as she fulfils the statutory requirement of being a person of recognized standing and professional experience in monetary or banking matters.