Reading the Draghi Tea Leaves
Draghi's ECB moves markets up, then down. S&P futures initially moved up, then down, as European Central Bank head Mario Draghi said he was "surprised" by the reaction to his now-famous comment that "other elements might follow" if there was a new fiscal treaty. He said this was not necessarily a signal that he would be initiating more bond purchases.
In addition, Draghi said inflation would remain above the target rate of two percent for several months to come, which makes it more difficult for him to argue for a more activist stance in bond purchases.
He did, however, say the ECB would adopt further non-standard measures.
Futures initially popped about 5 points as Draghi announced the ECB would be providing loans to banks of three years, up from 13 months that was previously provided. The net effect is to make it easier for banks to address their liquidity needs.
The ECB also announced it was easing collateral requirements for loans. Remember, the ECB provides loans to sovereign countries. They give out money and take collateral (sovereign bonds) in return. The more sovereign countries borrow, the more collateral they have to put up.
As expected, the ECB cut interest rates by 25 basis points to 1 percent.
Bottom line: Draghi did provide three elements widely expected — easing, more help for bank liquidity, and lower collateral requirements for loans to sovereign countries.
He made it clear these were measures designed to keep the banking system liquid, which at this moment seems to be his primary concern.
The renewed emphasis on price stability may be a bit of a political gambit. Mr. Draghi cannot seem to be weak on bond buying ahead of the political uncertainty of the European Union meeting. If there is a stronger agreement on how to control national budgets that come out of the meeting, Draghi may soften his stance.
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