ECB, Draghi will close the mandate defending Qe2 and rate cuts

4 'of reading

It will be the last meeting under the guidance of Mario Draghi, that of October. The most bitter, perhaps: in recent weeks, a (non-majority) part of the council has publicly expressed its opposition to the stimulus plan launched in September. A composite package which, moreover, is not giving – in this very first phase – the desired results.

Expectations do not take off

The problem is all about long-term inflation expectations, which monetary policy is called upon to manage more and before anything else. In the market measure, the prices of the inflation rate swaps 5y-5y – which refer to the period 2024-2029 – have collapsed to historic lows, to levels never seen even in the lowflation phase: they had reached 1.1338 on June 14th before of the September (and July preparatory) meeting, but fell further to 1.1150 on 3 October, and then after the announcement of the new stimulus package.

A less reliable indicator?
For Draghi it is a bad signal. There is the risk, he explained in September, that expectations are anchored at a level between 1% and 1.5%, below the 2% target. The swap is not the only measure available to assess expectations (even if it is the preferred one so far by the ECB): it is subject to distortions due to risk premiums and liquidity premiums, and in the last year its volatility has been increasing quickly and without pauses, perhaps signaling a lower reliability of the indicator. However, other measures also indicate a slight fall in expectations; while "effective" inflation remains at very low levels (even if for transitory reasons), far from target.

A qe with a reporting value only
The ECB – like other central banks – does not have a magic button to press to change expectations. Especially in this period, when monetary policy has been very accommodating for years. In the September press conference, Draghi had explained that the second quantitative easing was intended to change these expectations. But not through the mechanism of cause and effect that triggers, but for its "signaling" value: its meaning is – or would be, in the intentions of the ECB – in indicating the determination of the central bank to seize its inflation target .