ECB STATE OF PLAY: Draghi Takes First Step Toward 'Soft' Taper

By Jack Duffy

     PARIS (MNI) - European Central Bank President Mario Draghi took the first

step to a "soft" QE tapering of the bank's E2.3 trillion bond buying plan on

Thursday, seeking to reduce stimulus to the Eurozone economy without driving the

euro higher. 

     Draghi told journalists the Governing Council had had a "very preliminary"

discussion of tapering options at Thursday's meeting and that "the bulk" of the

decisions necessary "to calibrate" QE bond buying beyond the end of the year

would probably be taken in October. 

     But the ECB president tried to walk a fine line, saying  that a "broad,

robust, solid recovery" would eventually boost inflation but acknowledging that

the rising euro represented both a concern and a constraint. 

     "The recent volatility in the exchange rate represents a source of

uncertainty which requires monitoring with regard to its possible implications

for the medium-term outlook for price stability," Draghi said

     With new ECB forecasts for inflation being revised downward, mainly due to

the stronger euro, Draghi said "we will have to take into account this element

in our information set in our future policy decisions."  

     ECB staff projections now see Eurozone headline inflation rising by 1.2% in

2018 and 1.5% in 2019, down from June forecasts of 1.3% and 1.6%, repetitively. 

     The euro initially rocketed higher as Draghi spoke, climbing to nearly

$1.2060, but it quickly retreated back to the $1.20 level. Since the start of

the year the euro has climbed by more than 14% against the dollar as the

Eurozone economy has rebounded strongly. 

     Seeking to sooth FX market nerves, the ECB on Thursday left its QE "easing

bias" in place, vowing to ramp up bond purchases if inflation takes a turn for

the worse and reiterating that interest rates will not rise until "well past"

the end of QE bond purchases. 

     Draghi also hinted that while the tapering process was underway, the ECB

would not be tied to any specific timetable and that unexpected risks could

delay the process.

     Most economists expect tapering to start in January, with monthly bond

purchases reduced from E60 billion to E40 billion. How long the program takes to

be fully wound down could be six months to a year or more, however, depending on

the euro and inflation.

     Draghi suggested that progress toward achieving the central bank's mandate

of price stability will be the central guiding factor 

     "We are not there and the Governing Council wants to get there," Draghi

said.  

--MNI Paris Bureau; tel: +33 1-42-71-55-41; email: jack.duffy@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

[TOPICS: M$X$$$,M$$EC$]