Rarely has the European Central Bank gotten its communication with investors so wrong.
When its president, Mario Draghi, met with journalists on December 3, many financial-market players were expecting him to announce something big – an aggressive new round of monetary policy easing in the euro zone.
Their hopes would be disappointed. While Mr. Draghi did cut the bank’s deposit rate slightly, his moves didn’t come close to what investors and analysts had been expecting. European stocks plunged, and the euro rose sharply against the dollar – exactly the opposite of what the ECB, the guarantor of the euro zone’s economy, would like to see.
What happened? Market analysts blame the ECB for over-promising and under-delivering. Central bankers counter that markets were expecting too much in the first place.
A “complete failure” in market expectations is how it was described by Ewald Nowotny, the head of the Austrian central bank and a voting member of the ECB’s governing council, which is led by Mr. Draghi and sets monetary policy for the 19-nation euro zone.
In this exclusive interview with Handelsblatt, Peter Praet, the ECB’s chief economist, insists the ECB delivered “exactly” what it had intended, and what he supported. He explains what went wrong with the market’s expectations, why the ECB failed to correct the speculation, and how the central bank might be able to improve its communication in future.
Mr. Praet also leaves open the possibility that the ECB could take more aggressive action in 2016. The threat of a “third phase” in the global financial crisis, this time hitting emerging markets, might be the trigger.
Handelsblatt: Rather than the next big flood of money that was expected from the European Central Bank, there was only a very small expansion of the existing stimulus. Did you have to back down? Does the majority of the ECB’s Governing Council no longer support your and Mario Draghi’s policy?
Peter Praet: Quite the opposite: we had a very strong majority! By way of explanation: the relevant working groups provide the Executive Board with an analysis of the different measures and the Board discusses a monetary policy package, which I then put forward to the Governing Council. What was agreed last week is exactly in line with what I proposed to the Council on Thursday, taking into account what was discussed in the committees.
You had already met the other members of the ECB’s Governing Council for dinner on Wednesday though. Did you encounter so much resistance then that you scaled back your proposals before Thursday’s meeting?
The dinner always takes place, but these issues are not discussed during the meal. It is true that at first I was not sure how the proposals would be received. But in the end, the discussion was not very controversial. Not everyone was in favour of my proposals, but it is not the case that we said “we want this”, and then got less. That is just not true.