“European Central Bank President Mario Draghi has found his most effective weapon is the sound of his own voice.
Draghi yesterday caused the euro’s biggest drop in seven months by suggesting its recent appreciation could damp inflation, a signal that further interest-rate cuts remain a possibility. His pledge in July to buy government bonds precipitated a sea-change in sentiment that helped to shore up the 17-nation euro economy, yet the ECB hasn’t spent a cent so far in its so-called Outright Monetary Transactions program.
The ECB “is becoming a master of verbal intervention,” Danske Bank economists wrote in a research note. Draghi yesterday “managed to dampen recent de facto tightening without taking any action, much as was the case with the OMT program, which has so far managed to lower Spanish and Italian bond yields without buying a single bond,” they said.
Draghi’s oratory is helping the ECB navigate a path out of the sovereign-debt crisis for the economy, whose recovery from recession is being threatened by the stronger euro. The risk is he may eventually be forced to follow through on his promises and ramp up stimulus as looser monetary policies by the Federal Reserve and Bank of Japan weaken their currencies.
