By Johanna Treeck

FRANKFURT (MNI) – European Central Bank President Mario Draghi put
his foot down on Bundesbank-inspired exit talk, but a surprisingly
hawkish introductory statement suggests that the heat is on from Germany
and some other member countries who are concerned about inflation

The take-away from Thursday’s press conference is that interest
rates should remain firmly on hold in the months ahead and non-standard
measures will remain in place unaltered.

“I think that the President of the ECB has the last word on
this…Any exit strategy talk for the time being is premature,” Draghi

Draghi, who has thus far gone out of his way to emphasize his good
relations with and admiration for the Bundesbank, clearly sought to put
the kibosh on a Bundesbank-led debate over winding down the ECB’s
accommodative policies. That debate has grown increasingly noisy in
recent weeks.

The Governing Council will not consider an exit from its
ultra-loose policies before the full impact of the ECB’s three-year
tenders can be observed, and this might take some time, Draghi said.

“We will assess the implications of the LTROs, and we will look at
the assessment of price stability month after month, and then we will
make up our minds,” he said. He quickly added that at present “there
seem to be no inflation pressures” and “inflation expectations are
firmly anchored in the medium term.”

Those comments, which Draghi made in the question and answer
session, appear to contrast sharply with the introductory statement,
which was notably more hawkish than last month’s.

The statement contained a new sentence noting that the ECB has the
necessary tools “to address upside risks to medium-term price stability
in a firm and timely manner.” Historically, firm and timely were phrases
used to signal upcoming interest rate increases. The statement also
included a new assurance that the ECB “will pay particular attention to
any signs of pass-through from higher energy prices.”

Later, however, argued that he had not stepped-up his rhetoric on
inflation. Just like the overall exit debate, this discrepancy should
probably be attributed to diverging positions on the Council and indeed
among Eurozone economies.

The Bundesbank and its core country allies for whom domestic
inflation is also beginning to be a concern, are pushing for
increasingly hawkish language. Germany’s latest wage deal, which grants
public sector workers a 6.3% pay rise over 24 month, has no doubt
increased the Bundesbank’s concern about second round effects. That deal
was almost certainly the intended target of the comments in the
introductory statement about the ECB paying close attention to “signs of

Draghi, on the other hand, used his platform in the Q&A session to
assure markets that no rate hikes are imminent in the face of a shaky
Eurozone recovery. In fact, Draghi said that the Governing Council had
not even discussed possible interest rate changes in the months ahead.
It was the third consecutive monthly press conference at which he made
that statement.

The weak economic environment — with risks to the outlook still
seen on the downside — should prevent any tightening of monetary policy
to counter inflationary pressures in the core any time soon. At the same
time, high headline inflation should keep the ECB from easing monetary
policy further, despite the dire economic situation in many of the
Eurozone’s peripheral states.

Clearly, it is becoming increasingly difficult to set a common
monetary policy for the euro area. It is no surprise that the Governing
Council added a new section to the introductory statement reminding
governments that “it is up to national policy-makers to foster domestic
developments which support the competitiveness of their economies.”

Bundesbank President Jens Weidmann already warned that increasing
heterogeneity in the euro area “will see inflationary pressures rise in
Germany.” It may indeed become so difficult to set a common policy that
Germany could have to employ “other policy measures” to contain

This, however, does not mean that Germany, which makes up over 30%
of the Eurozone’s GDP, and its Bundesbank will make any concessions on
monetary policy. The anti-inflation rhetoric and exit talk will no doubt
continued to be heard.

–Frankfurt newsroom +49 69 72 01 42; Email:

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