ECB calls for patience, but suggests it will provide policy signals in autumn

• Draghi still keen to keep policy options open as far as possible
• Healthier activity suggests autumn announcement of reduction in policy support
• ECB confidence that inflation will head higher contrasts with latest Fed concerns
• Is today’s FX market reaction to Draghi a form of ‘taper tantrum’?
• Euro exchange rate could become a hot topic in holiday thinned markets

There was little expectation that the ECB would announce any major policy shift today, but there was some anticipation that it might move away from a commitment to step up its asset purchase programme if conditions were to weaken (it didn’t alter this) and there was also the possibility that it would provide some clarity as to when and what actions might be taken to scale back its current ‘very substantial degree of monetary accommodation’ (Mr Draghi set out not to do this either).

In the event, Mr Draghi said little new. While he did promise the ECB would have ‘significant discussions’ on its policy stance in the autumn, his repeated calls for ‘patience and persistence’ suggest a strong desire to prevent the market from anticipating any early or dramatic policy shift from the ECB.

Unfortunately for Mr Draghi, even the not surprising suggestion that policy would be reviewed in the months ahead prompted FX markets to push the Euro higher against other major currencies. Given that Mr Draghi noted that the Euro’s firmer tone of late ‘received some attention’ at today’s Governing Council meeting, a further strengthening of the currency was probably not the intended outcome. There is little question that the ECB wants to give the current upswing in the Euro area more time to strengthen and spread. However, the main reason for Mr Draghi’s caution today relates to persistently low inflation and the risk that a premature policy tightening or the market’s anticipation of such a move would push inflation even further from target. Arguably, the most notable comment from today’s press conference was the ECB president’s assertion that ‘the last thing the governing council wants is an unwarranted tightening of financial conditions that slows down or jeopardises the convergence of inflation’ towards the ECB target.

Unfortunately for the ECB, even a relatively innocuous if upbeat assessment of the Euro area’s economic prospects is likely to strengthen the Euro on FX markets, particularly on a day when the Bank of Japan downgraded its economic outlook and at a time when there is significant uncertainty about policymaking in the US- whether that relates to recent Federal Reserve concerns about below target inflation or broader issues such as Mr Trump’s difficulties in pursuing his domestic legislative agenda. This meant that even though interest rate markets moved little in response to Mr Draghi’s pronouncements, the Euro rose to its highest level against the US dollar in two and a half years.

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