Mario Draghi and ECB policy: After the current shock, he must act!

Mario Draghi does not have much time left as head of the ECB. In November he hands over to former IMF chief Christine Lagarde. After the last ECB meeting on 25th of July, where there was no easing in interest rates and bonds, the whole world now expects measures for the next regular meeting of the ECB on 12th of September. That is what Mario Draghi indicated. Either cutting interest rates or new bond buying programs, or both. Only the extent to which the ECB will become active is unclear. We think: At the latest after the current shock of this morning, Mario Draghi has to ease his ECB policy considerably. Because, as he himself said, he is not at all satisfied with the current inflation rate!

Mario Draghi must act

Now Mario Draghi can give Mrs Lagarde a big “relaxed gift” by taking ECB policy to a new phase of easing before she takes office. But in our opinion he must relax more than expected. For what the “leading media” obviously didn’t really notice this morning: In addition to consumer prices, which this morning were confirmed as final for July at 1.7% as previously announced, German wholesale prices were also published. And at -0.1% year-on-year they are now in deflation. Hello McFly, declining wholesale prices! This leads us to expect further weakening consumer prices. And this in the most important economy in the Eurozone!

ECB policy facing greater easing than previously thought?

How much does the market expect ECB policy to be relaxed on 12th of September? Every bank analyst currently has his own opinion! But the easing (interest rates down, new bond purchases) should be felt to be strong with this deflationary trend in German wholesale prices. Mario Draghi and his colleagues should take a close look at such data. And don’t forget: It was only in the days following the last ECB decision that the latest inflation data for the month of July were published. Ireland is now only at +0.5%. In Italy the inflation rate is now only 0.4%. We don’t even need to talk about the extremely weak data in industrial production in various countries!

Will the markets be surprised?

Question: Does the market expect a small step in easing ECB policy? Will Mario Draghi possibly loosen up more than many people expect because he sees the massive weakness in price developments? As we said, after the last ECB meeting, the situation has deteriorated significantly. Speculators could therefore speculate on a falling Euro before 12th of September (please do not take this as a trading recommendation!). This is because the Euro would fall if the ECB’s measures were larger than generally expected. But where is the general expectation? That is still an unknown quantity. We also have to see how the inflation data for August will turn out, which will be published very shortly before the ECB decision at the beginning of September. At any rate, the trend in prices in the Eurozone is currently still weakening!

Mario Draghi and Christine Lagarde in June. Photo: ECB

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