ECB President Mario Draghi had a great deal to say at the press conference following the bank's announcement that it would leave its main refinance rate unchanged at 0.25 percent.
He said that the eurozone has a modest recovery though risks to growth remain on the downside, that inflation will increase toward 2.0 percent, and the bank is firmly determined to maintain a high degree of accommodation. He noted that extended forward guidance remains in place and promised that the bank will take further action if necessary.
Mr. Draghi spoke and the euro soared. The more he spoke the higher the euro went. It might have been better for the euro zone's economy and exports if he had skipped conference altogether. The problem for the President and the ECB is that Mr. Draghi has said many other things in the recent past, and on those topics he was silent.
He said nothing about negative interest rates, an idea he brought to market attention last year. He did not end the weekly sterilization of the approximately €175 billion in government bonds that the bank still holds despite terminating the Securities Markets Program in 2012, even though it appears the Bundesbank has withdrawn its objection. There was no mention of a less than 25 basis point cut in the future, though that possibility had been widely speculated. And he said not a word about increasing or extending long-term-refinancing operations that would give the banks more money to lend, though do nothing about the lack of loan demand.
He did say that the Outright Monetary Transactions program could be acted on if certain conditions are verified. Since the primary condition for the program is a rise in EMU bond yields, the OMT is a solution without a problem and of no effect on current monetary policy.
All these potential liquidity increasing policies had been suggested by ECB officials or widely commented on in the press. Each had been considered something of a possibility by the markets.
The economic signs from the eurozone are not encouraging. Retail sales plunged 1.6 percent from November to December. Annual inflation sank to 0.7 percent in December less than half the 2.0 percent target rate where it was last January. It is expected to decline to 0.4 percent in February. Expansion of the EMU money supply (M3) has collapsed. It was 3.5 percent in December 2012 and 1.0 percent a year later. Bank lending in the 18 nation currency union has fallen to a two -decade low.
Over the past months the ECB and Mr. Draghi have been very publicly searching for a monetary policy expedient to increase liquidity in the euro zone and avoid the objections and presumed veto of the Bundesbank and its own charter.
Of five potential policy changes that the ECB could have enacted today, none came into being, only two were even mentioned.
On the topics that matter to the markets President Draghi was eloquently mute.
Chief Market Strategist
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