The ECB Is Listening to Your Concerns, But Not Really

May 8 2019

Today is Wednesday evening March 27, as I take the S8 metro in Frankfurt toward the airport. On my way, we are informed that for some unforeseen circumstance the metro is being redirected and will not stop at the airport.

I had to get off at the next stop, go back to the Frankfurt Hauptbahnhof station, and take another metro. No sooner said than done, I arrived with a minor delay to the airport.

Yet it was also an unforeseen circumstance that disturbed the monetary metro in the Eurozone. The outlook for economic growth has been deteriorating since last year, and as a result the European Central Bank (ECB) was forced to change course. But let us start at the very beginning.

They were all there, earlier that day. I am talking about the highest chief of the ECB, Mario Draghi, his second man, Luis de Guindos, and the chief economist of the board, Peter Praet. They were all there because of an annual gathering called “The ECB and its Watchers,” which takes place in Frankfurt. This conference brings economists, academics and ECB directors together to have a dialogue with each other and to gain greater sympathy for each other’s work and ideas.

I attended the conference largely to gain insight into whether the recent policy shift by the central bank is temporary or will last much longer before it reaches its final stop. The final stop would be raising interest rates. At the end of last year, voices from our monetary navigation device indicated that we would arrive at our final stop in the autumn of 2019. Earlier this year, it was announced that the route had been changed and that our trip would take at least until the end of this year.

When I left Frankfurt, I concluded that I had accomplished my mission. The answer to the question that I brought along to the monetary heart of Europe, is that it will take much longer before the ECB reaches its final destination.

The common thread in the comments by ECB members and the subsequent discussion in which they participated, is that the central bank is still full of confidence that economic growth will remain quite positive and that inflation will gradually climb back to the ECB’s 2 percent inflation target. Downside risks that growth turns out to be lower are abound, according to the bank. But there are no reasons to worry, the three monetary knights said in unison: we have sufficient tools to boost the economy.

First of all, we could push the moment we raise rates even further into the future. Freely translated: in the most optimistic scenario this could be postponing another rate hike to 2020. And then there are some other more controversial measures, such as buying bonds. Yes, unconventional monetary policy has negative side effects, said Draghi. This was newsworthy for starters, since not so long ago the very same gentleman said that such negative side effects did not exist. His colleague Yves Mersch stated, however, that these negative side effects are “not out of proportion relative to our task: achieving our monetary objectives.” This is a chockful of dry jargon which freely translated means: we don’t care.

Reading between the lines it became crystal clear that what awaits us the coming years in monetary policy is zero interest rates and other unconventional policies for as far as the eye can see. And what about those negative side effects? The end justifies all monetary means in the Eurozone. That is perhaps the best way to summarize the conference in Frankfurt. That and … “we don’t care,” of course.

In combination with persistent loose if not even looser policy at the Fed in the coming quarters, I would not be surprised if gold prices at the end of 2020 would climb toward $1,500 per troy ounce. Before it comes to that, I would expect gold prices to fall. Why? Soon I will explain why.

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