Draghi Holds Off on Monetary Policy Clues, Criticizes Deregulation Push -- 2nd Update

JACKSON HOLE, Wyo. -- European Central Bank President Mario Draghi offered no fresh clues on when the ECB might wind down its giant bond-buying program in a much-anticipated speech Friday, kicking back the discussion until at least next month.

Instead, Mr. Draghi criticized a global tilt toward protectionism, and warned against loosening postcrisis financial regulations, pushing back against key parts of the policy agenda of President Donald Trump.

Mr. Draghi's decision to eschew fresh policy hints, following the example of Fed Chairwoman Janet Yellen earlier in the day, comes ahead of meetings next month at which both the Fed and ECB could signal they will roll back easy-money policies adopted since the financial crisis.

Central bank chiefs "opted for coordinated silence at Jackson Hole," said Lena Komileva, chief economist at G+ Economics in London. "The pressure lies overwhelmingly on forthcoming policy announcements in September to guide market direction for the rest of the year. This means several critical months for the markets ahead."

At the Federal Reserve's annual late-summer retreat, Mr. Draghi said the ECB's EUR60 billion-a-month ($71 billion) bond-buying program had been "very successful," but said a "significant degree of monetary" stimulus was still needed to support the 19-nation eurozone economy.

That echoes the language used by the ECB chief after the bank's latest policy meeting in July. Still, the euro jumped to a 2 1/2 -year high of $1.1930 against the dollar after Mr. Draghi failed to discuss the single currency's recent strength. Traders took that as an invitation to buy it, betting that ECB officials don't object to the euro's current level.

Investors are watching closely for any signal that the ECB will start winding down its so-called quantitative-easing program, which is due to run at least through December. Mr. Draghi has said policy makers will discuss the future of QE in the fall, which includes its next policy meeting on Sept. 7. Markets also expect a move soon by the Fed to start reducing its $4.5 trillion balance sheet.

"The demand for an ECB game plan on tapering [winding down QE] will only get stronger and Draghi will have to address it," said Carsten Brzeski, an economist with ING in Frankfurt.

Mr. Draghi had used his last speech at Jackson Hole in August 2014 to lay the groundwork for the ECB's QE program, which was launched in early 2015.

Still, investors had expected little in the way of fresh policy cues this time, anticipating that the Fed and ECB would be reluctant to front-run policy makers' discussions -- particularly in the thinly traded month of August.

In a question-and-answer session, Mr. Draghi acknowledged that the eurozone's economic recovery is gaining ground, but said policy makers still hadn't seen the "self-sustained convergence" of inflation toward the bank's medium-term objective. Several factors are slowing that process, he said, mostly having to do with the labor force.

"We see the recovery is proceeding," he said. "So on one hand, we are confident as the output gap closes, inflation will continue to its objective over the medium term. On the other hand, we have to be very patient, because the labor forces that are slowing down and the low productivity are not factors that are going to disappear any time soon."

The eurozone economy has accelerated in recent months, outpacing the U.S. in the first quarter of the year and keeping pace in the second. Growth is spreading beyond traditional powerhouses like Germany and the Netherlands to Italy and Spain, whose economy expanded by 0.9% in the second quarter, the fastest pace in almost two years. Eurozone unemployment has fallen to an eight-year low of 9.1%, and consumers and businesses are buoyant.

At the ECB's July meeting, some policy makers had expressed concerns about the risk that the euro would "overshoot" in the future, according to the minutes. The common currency has appreciated sharply this year, especially as the risk of an anti-euro candidate's victory in France's presidential elections this spring receded. Stronger economic growth also has helped to drive the euro higher.

Top ECB officials recently have played down the euro's recent strength, however. Jens Weidmann, president of Germany's Bundesbank, said in an interview with a German newspaper this week that the stronger euro simply reflects the region's economic recovery.

More investors have been betting on further appreciation for the currency than at any time in the last six years, with speculators holding 79,267 more long than short contracts on the euro in the week to Aug. 18.

Against the dollar, the euro has risen by more than 10% this year, taking it to a 2 1/2 -year high, to levels last seen before the ECB's QE program began.

Mike Bird in London contributed to this article.

Write to Tom Fairless at tom.fairless@wsj.com and Kate Davidson at kate.davidson@wsj.com

(END) Dow Jones Newswires

August 25, 2017 17:22 ET (21:22 GMT)