Yesterday, three renowned central bankers delivered speeches. What can we learn from them?
On Tuesday, investors faced a triumvirate of central bank talkers. First, Mario Draghi, President of the ECB, gave an introductory speech at the ECB Forum on Central Banking in Sintra, Portugal. He said that the ECB’s monetary policy needed to be persistent, as inflation dynamics were not yet durable and self-sustaining. Hence, he reminded that this is why “the Governing Council has repeatedly emphasized that a very substantial degree of monetary accommodation is still needed for underlying inflation pressures to build up, and to support headline inflation in the medium term.” So, the ECB will remain ultra dovish for a while. However, Draghi also hit hawkish tones, as he assured that:
“The first is confidence that monetary policy is effective and the transmission process will work. All the signs now point to a strengthening and broadening recovery in the euro area. Deflationary forces have been replaced by reflationary ones.”
Therefore, Draghi’s speech was interpreted as hawkish, on balance. In consequence, the euro strengthened against the U.S. dollar, while gold gained.
Later, Mark Carney, Governor of the Bank of England, set the stage, but there were no fireworks. The Bank of England only ordered banks to build greater capital cushions in the near future to protect the country’s financial system from different risks.
And Janet Yellen, Fed’s Chair, said in London at the British Academy that banking reforms implemented after the last financial crisis had made the financial system safer. Although it may be true, she made too optimistic a statement:
“Would I say there will never, ever be another financial crisis? You know probably that would be going too far but I do think we’re much safer and I hope that it will not be in our lifetimes and I don’t believe it will be.”
Yeah, sure, this time is different, and the problem of financial crises has been definitely solved. This is probably why the Bank of International Settlements in its recent annual report (we will analyze it in more detail soon) warned of trouble ahead for the world economy.
Last but not least, Patrick Harker, Philadelphia Federal Reserve Bank President, also delivered a speech in London. He sounded rather dovish, saying that the U.S. central bank may have to reconsider its plans to tighten monetary policy if the inflation outlook deteriorates. Harket’s comments supporter the rally in the euro and gold. In consequence, gold prices nearly rebounded to pre-Monday’s flash crash level.
Summing up, Tuesday was full of central bankers’ talks. Draghi’s speech was probably the most important, as he turned out surprisingly hawkish. If the ECB adopts a more hawkish stance, while the Fed returns to a more dovish policy, the yellow metal should gain. However, if the current level of divergence in monetary policies remains, gold should be trade sideways.