Draghi on the Ropes After German One-Two Punch, But Still Ahead on Judges' Cards
European Central Bank President Mario Draghi was hit with an unprecedented one-two punch of German pressure Wednesday as the country's top banker and its venerable finance minister called for an end to ultra-low interest rates just a few miles down the road from the Bank's headquarters in Frankfurt.
However, with the euro stuck at a near two-and-a-half year high against a slumping U.S. dollar and the likelihood of softer inflation projections, neither gentleman is likely to be satisfied by Draghi's counter-punch reply in the sweet science of monetary policy.
Wolfgang Schaeuble, the country's plain-speaking finance minister and Chancellor Angela Merkel's staunchest ally, struck first by telling an audience of bankers and businessmen in Frankfurt that it was time to "normalise" ECB policy. The call comes as Draghi and his colleagues start their regular two-day policy meeting in the central German city that some have argued should signal the end to its two-year, €2.3 trillion program of quantitative easing and negative interest rates.
"Unusual monetary policy implies it is not usual or normal - we should get back to a normal monetary policy," Schaeuble said. "We have come back to a normal situation much quicker than people thought."
His comments followed shortly on the heels of a similar jab from John Cryan, the CEO of Deutsche Bank DB, Germany's biggest lender and one of the largest banks in the world, who declared that "the era of cheap money in Europe should come to an end - despite the strong euro."
And therein lies the problem.
The Bank's ultra-loose policies have pulled currency area inflation from an all-time low of -0.6% to the now faster, although still tepid, rate of 1.5% as the economy gathers its fastest pace of growth in more than six years.
But with a balance sheet of more than €2.5 trillion, firming economic growth, rising political pressures and a dwindling supply of acceptable bonds to buy, many ECB watchers have been predicting a definitive signal from Draghi & Co. that would trigger the eurozone QE's long unwind and the gradual normalisation of interest rates.
The euro's advance -- it has gained nearly 12% against the dollar since the start of the second quarter -- are making those predictions increasingly difficult to justify.
Fresh inflation forecasts from the Bank's economists, which will be released during Draghi's press conference Thursday, are expected to trim June's projections of a 2017 average of 1.5% and a 2018 dip to 1.3%, as those figures were based on an euro/dollar rate in the 1.09 to 1.11 region and Brent crude prices in the $51.00 range.
Given the optics of modestly slowing growth dynamics, a core inflation rate of only 1.2% -- some 80 basis points shy of the Bank's "just below" 2% target -- and increasing global uncertainty, Draghi will simply not put the extraordinary effort he and his colleagues have expended since riding to the euro's rescue in 2012 at risk with an early QE exit simply because markets demand it and politicians push for it.
The best that euro bulls can hope for is a hawkish bone from the ECB President during his regular question-and-answer session with the media, when he often goes "off piste" from the text agreed with his Governing Council colleagues.
With the current program of €60 billion a month in asset purchases pegged with a soft deadline of December (Draghi has consistently said "and beyond if necessary"), he will need to provide some degree of clarity as to what happens this Christmas.
But the guess is that softer growth and inflation forecasts will provide all the hints we need.
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