European Central Bank (ECB) President Mario Draghi has stated that the ECB’s low rates will continue for an extended period. This month marks the premiere of forward guidance to the ECB lexicon. Gone are the days of Jean-Claude Trichet, who for eight years as president of the ECB managed to avoid giving straight answers for the most pressing questions on Europe’s economy, while stressing that the ECB never “pre-commits” on monetary policy. Draghi, on the other hand, has tried different approaches.
He has done the bold approach. He pledged to defend the EUR with bravado (“whatever it takes”). At times he has been the face of optimism declaring the “worst is behind us”. Now he has settled on a forward guidance methodology designed to reassure markets after mechanisms such as the Outright Monetary Transactions (OMT) have been muted due to higher yields stateside.
The ECB’s current stance is dovish. Rates have nowhere else to go after sinking to all-time lows. Contrasting the U.S. economic recovery story, Europe is still facing deep unemployment, unresolved bailout concerns, and political fragmentation. The Bank has not clearly outlined which economic indicators it will consider before dictating any policy changes. To fully adopt forward guidance, it will need to move away from the “two pillars” approach of money supply and embrace a wide range of economic barometers.
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