In today's only major risk event, at 3pm CET (9am ET) Mario Draghi will hold his quarterly hearing before the European Parliament, and his final scheduled appearance before next week’s monetary-policy decision, in which the ECB president will be pressed about his plans for stimulus withdrawal. And, as has been the case in recent months, Draghi will respond that while euro-area data has been improving (this week may show the strongest economic confidence in a decade and the lowest unemployment since 2009) Draghi can still point to consumer prices that are struggling to lift off.
“Draghi will explain that the improvement in the economy is not sufficient at this point to make sure that the improvement in the inflation outlook is self-sustained,” said Philippe Gudin, chief European economist at Barclays quoted by Bloomberg. “We are still far from the point at which we could see inflationary pressures materializing.”
At the same time, Draghi’s hearing at the European Parliament’s Economic and Monetary Affairs Committee is another opportunity to tout the euro area’s recovery, and the "favorable impect" of the ECB’s €2.3 trillion bond-buying program, which has ballooned the ECB's balance sheet to the biggest in the world.
On the other hand, Draghi’s four-year inflationary campaign has so far failed to put price growth on a self-sustaining path toward the ECB’s goal of just under 2% and if anything, there are hints that the target is receding further into the future. Economists predict that data due Wednesday will show the inflation rate fell to 1.5 percent in May from 1.9 percent. More worryingly for the central bank, core inflation is slated to slow to 1 percent. Additionally, a key missing element in the ECB’s inflation mix is wages, which have been rising very slowly despite falling unemployment, even in countries like Germany where joblessness is at a record low.
“We have discussed quite extensively why wage increases are relatively subdued, but in my view this is a matter of some time lag,” Governing Council member Ewald Nowotny said on Monday. “If the upswing gets more consolidated, we can expect higher wage dynamics, which means that also core inflation might get stronger.”
And just like in the US, as many of the jobs created since the crisis are short-term or part-time, the labor market may have greater spare capacity than official measures suggest, leading workers to opt for more hours before higher salaries. A pick-up in real wages may have to wait until the beginning of next year, when many collective contracts will come up for re-negotiation.
According to Bloomberg, that’s all reason for Draghi to stick to his rhetoric of patience and caution.
“He’s not yet sufficiently confident on the durability of the inflation recovery, and there are few signs of an improving core-inflation outlook,” said Anatoli Annenkov, senior economist at Societe Generale in London. “I doubt his message will change much compared to recent appearances.”
“I think he has to be quite dovish,” Peter Rosenstreich, head of market strategy at Swissquote, said on Bloomberg Television on Monday. “There’s growing expectation that inflation is building and that the time for unorthodox extreme monetary policy is now coming to an end.”
Draghi's prepared remarks can be found at the following link, and the key highlights are below. As expected, despite the so-called recovery, Draghi is convinced that much more easing is necessary:
- DRAGHI SAYS AN EXTRAORDINARY AMOUNT OF MONETARY POLICY SUPPORT, INCLUDING THROUGH OUR FORWARD GUIDANCE, IS STILL NECESSARY
- DRAGHI SAYS EURO-AREA UPSWING IS INCREASINGLY SOLID
- DRAGHI SAYS DOWNSIDE RISKS TO GROWTH ARE FURTHER DIMINISHING
- DRAGHI SAYS SOME OF THE TAIL RISKS HAVE RECEDED 'MEASURABLY'
- DRAGHI SAYS EURO AREA STILL NEEDS VERY ACCOMODATIVE CONDITIONS
- DRAGHI SAYS ECB FIRMLY CONVINCED EURO AREA STILL NEEDS SUPPORT
Watch Draghi's speech live below