In last week's blog I confidently asserted that today we would be treated to another masterful performance from M.Draghi at the ECB's post-meeting news conference. I expected soothing words, and they were duly delivered, but that was not quite the whole story. You have to admit, he IS good, isn't he-a true Master of the Universe to use Tom Wolfe's hyperbolic epithet? But today I thought I caught a whiff of frustration, even perhaps resignation, a very human side that suggested maybe he realizes the ECB toolbox is nearly empty, with the Euro still only half-way to salvation.
In line with expectations, the ECB didn't indulge in interest rate cuts or the announcement of new non-standard measures, but contrary to expectations neither did they reveal any measures specifically targetted at addressing 'credit fragmentation', ie the phenomenon that corporate loans are cheaper and more readily available in core countries than in the periphery.
What he did do, however, is repeatedly allude to the fact that growth is weaker than expected, with clear downside risks, that inflation is firmly below the ECB's usual definition of its mandate, 'to maintain an inflation rate which is below, but close to 2%, and that it would probably remain so for the foreseeable future. Later in the conference he even admitted that economic weakness was growing even in countries which are not suffering from credit fragmentation-which was absolutely key. M.Draghi hasn't thus far employed his predecessor's Delphic code-words to signal future monetary policy actions, but today he surely did.
Discussion over possible measures to address the situation had been 'extensive', with a consensus decision to refrain from action. This seemed to me like a pretty explicit admission that the decision not to cut rates or use non-standard measures was on a knife-edge and a firm indication that further action was in the works for the near future. Yet, as for rates, how much can be achieved? A cut in the main refinance rate to 0.5% from 0.75% may achieve a small reduction in interbank lending rates, (at least between 'core' banks), but 3m Euribor is already at 0.21%. The surprise would be a move into negative territory for the Deposit Rate, but that seems pretty un-ECB to me and probably a last ditch move to be kept in reserve in case the Euro starts to strengthen too much, say. The impression given was that interest rate cuts would be less likely than some further form of QE, which would of course be dressed up as something else, no doubt by the use of a clever new acronym.
Even when he was holding forth on his favourite subject of credit fragmentation, he seemed like a man frustrated at his inability to help-citing his oft-repeated mantra that the ECB had addressed the matter of liquidity for banks and so that shouldn't be holding them back from lending to real people and businesses-he gave the distinct impression that a Funding for Lending scheme, a la the Old Lady of Threadneedle St., was way too left-field for the ECB and anyway, the job of politicians.
Draghi stayed very quiet as the Cypriot crisis unfolded, but today he sure set the record straight. He was at pains to describe the original Cypriot bail-in proposal, involving insured depositors, as 'not smart', he suggested that Mr Dijsselbleom's comment that Cyprus might be a 'template' for other countries must surely have been 'misunderstood', he emphasized that the Cypiot experience only served to underline the need to quickly move to complete an EU banking union and finally, he repeatedly urged governments to get their fiscal 'houses' in order-giving the distinct impression that there was a limit to what the ECB could do-and that the limit was very near!
In contrast to a fairly mundane ECB meeting was an extraordinary BOJ meeting, held earlier today. Suffice to say that the measures announced were straight out of the Mugabe Manual of Monetary Policy and we'd all better hope they aren't too 'successful'. Japan Inc. had certainly better hope the bond markets continue to focus on the effect of BOJ buying on JGB prices, rather than on any future danger of inflation getting out of hand.
With interest payments on debt already accounting for more than a quarter of government spending-even with interest rates at 0.5%, and lower for shorter maturities-this situation always makes me uneasy. How can I put it, it'll all be perfectly sustainable, until it isn't. If inflation expectations get out of hand, and rates start to rise, the BOJ may just have to buy more JGB's and so on, and so on...remind anyone of other seemingly 'sustainable' models? Here's a few-'the US housing market never goes down simultaneously on a nationwide basis', 'the internet has created a new paradigm', 'you've got to keep dancing while the music's still playing'. All great ideas, until they weren't.
Maybe the Master of the Universe is relying on the BOJ to do his job for him.