LONDON (Reuters Breakingviews) - European Central Bank President Mario Draghi has made many promises, and lived up to them. Yet this time, financial markets want to see the colour of his money upfront.
Draghi on Thursday opened the door to more monetary policy easing. That could mean a cut in the policy rate, which is already at a record low of minus 0.4%, or more asset purchases. The Italian reckons the euro zone economic outlook is getting worse. Bleak economic reports this week included a weak purchasing managers’ survey on Wednesday showing manufacturing activity in the 19-member bloc contracted for the sixth month running in July and at its sharpest rate since late 2012. Nor is Draghi happy with inflation, which has persistently undershot the ECB’s target of just below 2%.
Yet big hints at more stimulus were all that investors got from the ECB boss, who will be replaced on Nov. 1 by Christine Lagarde, the former head of the International Monetary Fund. That wasn’t enough for them: The euro reversed initial losses while bond and stock prices gave up brief gains. This is not necessarily a bad thing. The more excited investors grow in advance, the more blasé they are when they get what they were promised. That was certainly the case with the big ECB asset purchase programme that started in March 2015.
Draghi will have to act, probably in September, to keep markets on side. Impressing money managers is, however, the least of the central bank’s problems. Keeping a lid on the euro and borrowing costs helps the economy but won’t on its own generate the sort of price pressures needed to push inflation close to 2% or beyond. That will be Lagarde’s problem.
Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.
Sign up for a free trial of our full service at https://www.breakingviews.com/trial and follow us on Twitter @Breakingviews and at www.breakingviews.com. All opinions expressed are those of the authors.