The power of Draghi’s words

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Today’s ECB meeting and subsequent speech by Draghi will shape the future outlook in the markets and will define future policy directions.

Mario Draghi
ECB Chairman Mario Draghi

Words used by influential policymakers often work effectively to shape the future of the financial markets. ECB Chairman, Mario Draghi’s famous promise that Europe would not be left high and dry by the ECB, prove that his opinions hold as much power as his actions.

With policy changes stalled and some sort of action needing to be seen by the markets, the next best thing was a reassuring word from the president. Today’s meeting of ECB policymakers is expected to be status quo — and with rates stagnating, the press conference will shape markets going forward.

The ECB meeting comes amidst mixed signals from the Fed. In June, the Fed made the announcement they would be tapering their stimulus and bond buying, which can only be seen as a liquidity squeeze — leading to higher interest rates for the U.S. and Europe. However, the recent ‘stay the course’ announcement means that borrowing costs in the future don’t seem any more stable than before.

Europe has been experiencing excess liquidity in its financial systems since late 2011, ever since loans were issued to different banks in order to stimulate the economy, which lead to all-time low interest rates thoughout the region. As the amount of loans outstanding decrease from 813 million euros in 2012 to 216 million euros now, rates are expected to be influenced in the near future and so, (no secret here) a policy turn is just ahead.

However, until a clear-cut verdict is out on the policy and its impacts, Draghi will have to use his considerable sway to add confidence to the macro economy. Another expected change might be that loans that have been returned, are then pumped right back into the system in order to stimulate the region further, with the bonus effect of keeping rates low.

Past speeches by Draghi show that economic data is improving in the region as it pulls itself out of recession, but high unemployment is still a drag on the economy. One of the challenges yet to be addressed is the unemployment rate which has failed to drop, even through the economic recovery.

In addition, another concern is the Basel rules and stress testing on the banks in order to ensure that banks are liquid enough to operate.

The delicate ECB high-wire act inspires caution when lending to the banks, so this is another area that needs further exploration. Draghi must ensure that lending to banks continues, while continuing to enforce rigorous credit standards — but also improves employment opportunities for citizens while keeping inflation in check.

© Zain Naeem

Photo: European Parliament

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