ECB chief Draghi was overinterpreted by markets

SINTRA, Portugal June 28, (RTRS): European Central Bank President Mario Draghi intended to signal tolerance for a period of weaker inflation, not an imminent policy tightening, when his comments sent the euro higher this week, sources familiar with Draghi’s thinking said on Wednesday.

Draghi’s intention was to set up September as the earliest the bank would discuss rolling back stimulus, they said, but stressed it was by no means certain that it would come to a decision then.

“The market failed to take note of the caveats in Draghi’s speech,” one of the sources said.

Draghi’s comments on Tuesday, taken as a hawkish swing, sent the euro and bond yields sharply higher.

The sources said Draghi wanted to acknowledge the recent, strong economic data and prepare the market for a possible autumn decision on the future of the ECB’s 2.3 trillion euros bondbuying programme but without making any commitment.

He also wanted to note that the ECB will not automatically ease policy due to the current slowdown in inflation, which is seen at 1.2 percent in June and is expected to hover around that level next year.

Instead, the central bank is prepared to let prices take longer to reach its target of just under 2 percent, even after more than four years of inflation misses.

But the speech was full of caveats, which also imply that the ECB is still ready to ease policy if financing conditions tighten as a result, for example, of a stronger euro or higher yields in the United States or Europe, the sources, who spoke on condition of anonymity said.