As widely anticipated, the ECB left policy on hold and Draghi did not change his tone or general assessment. The euro whipped around a bit on the headlines and spiked down to new session lows just ahead of $1.3350, but rebounded quickly toward the session highs near $1.3390.
There are five points Draghi reiterated:
1. The recovery is fragile, moderate and uneven
2. The risks, aggravated by geopolitics and the sluggishness of structural reforms, are on the downside. Growth momentum appears to have slowed.
3. Medium and long-term inflation expectations are anchored
4. The TLTROs will help facilitate more lending and the ECB expects a sizable participation
5. Credit standards remain relatively tight, but some loan segments show increase demand
We do not know anything from Draghi we did not know already. The PMI data have warned the growth momentum has slowed. The Bundesbank itself cautioned that the German economy may have stagnated in Q2. The Italian economy contracted in Q2 for the second consecutive quarter. Its minor gain of 0.1% in Q4 '13 was the only positive growth recorded since Q2 2011.
Draghi's assessment that the medium and long-term inflation expectations are anchored likely refers to the ECB's staff expectations, which have persistently been greater than what materialized. Indeed there is some risk the staff will reduce its inflation forecast again from the 0.5% rate projected in June.
Draghi reiterated that the ECB's preparations for an asset backed securities purchase program are being expedited. A consultant is about to be hired to help design the program. He also expressed confidence of strong participation in the TLTRO. He suggested the market was looking at 450-850 bln euro take down, which would largely replace the net LTROs (some of the demand for which was from facilities that already existed at the time).
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