After Janet Yellen gave a surprisingly hawkish speech to San Francisco’s Commonwealth Club last night, today’s turn in the monetary policy spotlight belongs to Mario Draghi.
The Governing Council of the European Central Bank (ECB) meets today at its Frankfurt headquarters to discuss its three interest rates (currently near zero) and its controversial asset purchase programme, better known as quantitative easing (QE).
The monetary policy decision comes at 12:45 GMT, but markets will be watching just as closely during the press conference 45 minutes later, when ECB president Draghi will face scrutiny from the world’s media at a press conference.
While expectations are firmly against any change in monetary policy, as ever the tone of proceedings will be just as important. Here’s what to look out for.
Dissent from Deutschland
The latest ECB minutes pointedly showed that “ a few members” of the Governing Council, which is drawn from the Eurozone member states, dissented from the continuation of QE.
All fingers immediately pointed at Germany, whose Bundesbank president, Jens Weidmann, has been outspoken in his opposition to QE. He thinks it should be reserved as an emergency measure, and that it punishes savers.
Draghi is bound to face questions on this, so listen for any signs of argument over asset purchases.
The many faces of inflation
One of the reasons German economists in particular dislike QE is the fact their economy is heating up far more than the rest of the Eurozone. Europe’s largest economy saw inflation more than double in December to 1.7 per cent, driving the headline inflation figure up across the Eurozone.
However, the ECB is likely to signal it will not act too early as deflation is still a threat in parts of the bloc, such as Ireland, while price growth in other vulnerable countries such as Greece and Cyprus is still meagre.
Add to that the fact that core inflation, which strips out volatile components such as oil prices, remains below one per cent and there’s little incentive for the ECB to tighten now.
Bond buying botheration
The last set of minutes also showed “concerns relating to the scarcity of German sovereign bonds” were a factor in reducing bond purchases, which are aimed at pushing money off bank balance sheets into the broader economy.
At the last meeting purchases were reduced from €80bn to €60bn, although the duration of the purchases was extended. Draghi was clear in his efforts to fight talk of a “tapering” in the programme.
However, if there are signs of liquidity problems in QE bond buying and no further moves to broaden the universe of eligible bonds that could force the ECB to tighten earlier than planned.
Trumpflation and Brexit
As ever, a conversation about Europe’s finances will morph into a conversation about global politics. The day before the inauguration of Donald Trump as US President, Draghi is bound to face questions about whether the new administration's reflationary policy could cause problems for the Eurozone.
Close to home, another ugly portmanteau will be occupying EU policymakers (and journalists, and everyone else) for the next two years at the very least: Brexit. Draghi is certain to be asked about the potential impact on Eurozone growth, with all of its implications on monetary policy.
Those shocks to the EU politicians have already happened, but there could also be more to come, with anti-euro challengers expected to put up a scrappy fight in France, the Netherlands, and even Germany. It won’t be a boring year for the ECB.