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Dave Lafferty : "If you were waiting for evidence that European monetary policy has turned the corner, you'll definitely be disappointed... if not surprised."

Draghi essentially confessed to what everyone already knows - the European economy , after a short bout of strength in late 2017/early 2018 - is decelerating again.

Draghi essentially confessed to what everyone already knows - the European economy , after a short bout of strength in late 2017/early 2018 - is decelerating again. As importantly, several years of negative overnight rates and billions in asset purchases have done nothing to push up inflation or inflation expectations.

Historically, central bank projections typically evolve slowly in 0.1 or 0.2 percentage point changes. While a reduction in the growth estimate was expected, the outsized downgrade from 1.7% to 1.1% for this year was eye-opening.

In response, Draghi announced several policy changes punctuated by a new set of TLTROs. The TLTROs were expected given the impending roll-off of loans next year where discontinuing the program would have been tantamount to tightening. Kudos to the council for dressing up these measures, but investors know it just the same old medicine in a new bottle.

New TLTROs may be the best the ECB can offer given that further reducing overnight rates below 0% taxes banks who are already struggling. Meanwhile, additional asset purchases are limited as there are no more high quality bonds to buy.

The euro fell and bunds rose (yields down), a natural response to accommodative tinkering. A more cynical explanation of euro depreciation is that investors realize that growth may be ‘lower for longer.’

Draghi is discovering that extraordinary policy initiatives may stave off depression, but they have shown little ability to create and sustain an economic expansion. It is the very picture of ‘pushing on a string.’

David Lafferty 11 March
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