Mario Draghi may have cried wolf one too many times.
I've watched with amazement over the past couple of years as the European Central Bank president has gotten more mileage from saying what he intends or plans to do in the future – without actually having to do it – yet nearly always gets the financial markets to do what he wants them to do.
But, it looks like he ran out of luck on Thursday when he announced at his regular press conference after the ECB's monthly meeting that the bank was going to put off until "early next year" any new measures to try to stimulate the moribund Eurozone economy.
Not surprisingly, the euro surged, sovereign bond yields rose and stock prices plummeted after Draghi’s disappointing remarks. The euro jumped over a penny, or more than 1%, against the dollar while yields on Italian and Spanish 10-year government bonds rose about four basis points. In recent weeks, yields on Eurozone sovereign bonds have dropped to their lowest levels on record on speculation that the ECB would soon start buying up those bonds, as well as those of other countries.
Before the meeting, it had been widely expected that Draghi would announce the ECB will start buying government, and possibly corporate bonds too, to try to boost inflation in the zone. So far it has bought covered bonds and other asset-backed securities, with little in the way of economic improvement to show for it. Indeed, at the ECB's previous meeting in early November, Draghi said the bank would take further steps to increase its balance sheet in order to boost the currency zone's economy, which many took to mean government bond purchases were next on the agenda.
"Our balance sheet will keep expanding in the coming months and will continue expanding while the balance sheets of other central banks are bound to contract," he said back then.
On November 25th, the Organization for Economic Cooperation and Development called on the ECB to embark on a more aggressive quantitative easing program that includes purchases of government bonds, "possibly via a weighted basket of euro area countries and investment-grade corporate bonds."
But after Thursday's meeting, Draghi said the ECB would alter "the size, pace and composition of our measures" only if it concludes that its current policies aren't working, even as it released lower forecasts for economic growth and inflation over the next two years.
"Early next year the governing council will reassess the monetary stimulus achieved and the outlook for price developments," he said. We'll just have to wait a little longer.
If the recent performance of the Eurozone economy doesn't dictate that the time for action is right now – and Draghi noted that the drop in oil prices makes the ECB's efforts to boost inflation even more difficult – then when exactly would be the right time?
According to many, Germany – which has two voting members on the 24-member ECB governing council – has been pressuring the ECB against such quantitative easing efforts. But Draghi dismissed that notion.
"We don't need unanimity," he said.
At least the language in the ECB's official statement was slightly more definitive about increasing the size of its balance sheet than it was in November. Draghi said the bank "intended," rather than "expected," to boost the size of its balance sheet by about €1 trillion ($1.23 trillion). Although that could be just parsing words.
The ECB now expects the Eurozone economy to grow by just 0.8% this year and 1% in 2015, down from its previous forecast of 1.6%. It expects an inflation rate of 0.5% this year and 0.7% next year, well below its goal of 2%. The forecast for 2016 calls for growth of just 1.5% and inflation of 1.3%. Lower oil prices would make it even more difficult to boost inflation, Draghi said.
So where do we go from here?
While today's non-announcement is certainly disappointing, further easing by the ECB is inevitable, and it will eventually start buying sovereign bonds, maybe on Draghi's "intended" date of "early next year." Despite his penchant for teasing the markets, Draghi does eventually put his words into action. But then again he doesn't seem to have much choice – or time – this time.
Indeed, Draghi noted that a delay will make the current bad situation even worse. Maintaining the ECB's current policies, he said, could amount to monetary tightening, which he said he won't tolerate for long.
This to me means that the massive rally in euro zone sovereign bonds over the past three years will continue. Three years ago, 10-year Spanish and Italian bonds were yielding over 7%. Now the Spanish bond is comfortably below 2% while the Italian security is hovering right around there, well below rates on comparable U.S. Treasuries.
Yes, the easy money has already been made, but further price gains in Eurozone bonds likely lie ahead. But it may not happen for a few more weeks.
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George Yacik
INO.com Contributor - Fed & Interest Rates
Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
