Draghi Speech in Brussels Emphasizes Policy Coordination Again

Talking Points:

- Other policies significant for the time it takes to bring inflation back to objectives

- Cost of a delay to reaching economic potential are very high

- ECB still far from its inflation target of close to 2%.

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In a speech at an economic forum in Brussels, ECB president Mario Draghi re-emphasized the importance of other policies to assist the ECB’s stimulus measures.

The issue of the need for other policies to assist the ECB is a consistent theme in ECB speeches, but appears to be even more so in the last couple of months as the bank appears to be in “implementation mode” of the policy measures announced in March.

Draghi commented that monetary policy does not exist in a vacuum, and that a better description for the situation is “independence in interdependence”, referring to other policies, which he remarked have heavy significance.

The reason Draghi outlined was that the conditions in which monetary policy operates are important for the time it takes to bring inflation back to objectives. If other policies, such as the fiscal side, are helping monetary policy, inflation can return to objective quicker.

Draghi also said it’s important that the correct structural policies are in place, as they can help limit shocks, and support anchoring inflation expectations, and much more needs to be done in that policy field.

Lastly, the ECB president remarked that uncertainty over the institutional stability of the euro area also matters for monetary policy, since instability can slow down the transmission of monetary policy.

Draghi summed by saying that the cost of a delay reaching economic potential are very high, so it’s in everyone’s interest to act without delay.

The speech comes on the backdrop of years of aggressive monetary policy and stimulus measures, with the ECB still far from its inflation target of close to 2%.

The DailyFX Speculative Sentiment Index (SSI) is showing thatabout 38.4% of traders are long the EUR/USD at the time of writing. The SSI is mainly used as a contrarian indicator, implying further strength ahead for the EUR/USD.

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EUR/USD Daily Chart: June 9, 2016

--- Written by Oded Shimoni, Junior Currency Analyst for DailyFX.com