ECB's Draghi sees the Eurozone recovering in second half of the year

The ECB Governing Council decided to keep the main interest rate unchanged at 0.75% at their December monetary policy meeting. Speaking at the press conference following the meeting ECB head Mario Draghi commented on the considerations underlying the decision.

The president suggested that inflation should fall below 2% in the coming months and assured that inflationary pressures should remain contained. He said that economic growth would remain weak in the “early part” of 2013 and recover very gradually, along with the improving situation on financial markets. The recovery would be supported by the ECB's accomodative monetary policy stance, better external demand and easier financial market conditions.

Mario Draghi commented on the the liquidity situation of EU banks, which recently repaid €140.6 billion of the €489.2 billion obtained through LTROs, which reflects the improvement in financial market confidence. He nevertheless urged EU officials to carry on with the reduction of “both fiscal and structural imbalances and proceed with financial sector restructuring measures” which should boost confidence further.

When asked about the recent appreciation of the shared currency and whether it could hurt recovery, the ECB chief answered that it could be an indication that confidence in the euro begun improving. He added that the central bank would continue to closely monitor money market developments. 

According to Richard Kelly, Head of European Rates and FX Research at TD Securities: "Draghi seems to have wanted to manage euro from appreciated further, but did not particularly want to talk it down. By tying the discussion to the possibility of forecast changes in March, he also seems to be trying to reinforce euro around current levels. For now, the market has obeyed, but perhaps unfortunately for the Governing Council, EUR/USD has typically tended to ignore such soft guidance if the fundamentals suggests a contrary move so we will still be beholden to the data."

Incoming BoE governor Carney not so intent on drastic policy changes

Mark Carney, the incoming governor of the Bank of England, testified before the UK Treasury Select Committee on Thursday, after submitting written evidence. He assured that he would not alter significantly the central bank's current monetary policy strategy but that he was in favor of introducing more stimulus for a period of time and of communicating it in order to help manage market expectations.

Nevertheless, he said that it would be important to review the monetary policy sporadically: "Although the bar for change... should be very high, it seems to me important that the framework for monetary policy - rightly set by governments and not by central banks - is reviewed and debated periodically."

When asked about the UK's current monetary framework, Mark Carney said that: “The flexible inflation-targeting framework should remain broadly in place, but details need to be reviewed and could be changed.” He also suggested that contingent guidance is a useful tool, such as the US Fed's pledge to keep interest rates at close to zero until unemployment falls below 6.5%.

Additionally, the next BOE chief stressed that the Bank of England should closely cooperate with the ECB on Europe's banking union.

James Knightley from ING comments on Carney's testimony: “He is generally perceived to be somewhat more dovish than the outgoing Governor, Mervyn King, and his testimony to the Treasury Select Committee is in general supportive of that view.”