The ECB decision

The ECB has published an unchanged statement on its monetary policy.
Mario Draghi’s speech was moderate showing that there is no hurry at the ECB in the monetary policy management. No signal on a possible change in the QE framework in the future. The ECB president said that a decision will be taken at the October meeting but said nothing on details of the discussion. Nothing was said on scarcity of bonds in some country and on how capital keys could be respected.
Interest rates are unchanged and will remain low for an extended period. This stability will go beyond the end of the QE. As the ECB forecasts do not show higher inflation in the future and a convergence to the 2% target that will not take place before 2020 we can expect that ECB’s interest rates will remain at the current level (0% for the refi rate) at least until 2019. (see forecasts here)
QE is still at Eur 60bn until at least December 2017. It could be extended after this date if long term inflation expectations do not converge to 2%.

According to the ECB: more growth in 2017 but less inflation all the time

The three charts below show the ECB forecasts for GDP growth, the inflation rate and the core inflation rate. They have been updated today with the ECB meeting.
Growth has been revised on the upside for 2017 but remains unchanged, compared to June, for 2018 and 2019. The inflation rate and the core inflation rate have been revised down. The inflation convergence will not take place before 2020.
Therefore you have to expect that the ECB interest rates will remain at the current level (0% on the refi rate) at least until 2019.
ecb-2017-september-growthforecast
ecb-2017-september-infforecast
ecb-2017-september-coreinfforecast

10 points from Mario Draghi’s press conference

Here are the most salient points of Mario Draghi’s press conference after the monetary committee of the European Central Bank

  1. ECB interest rates remain unchanged. The refi rate is at 0% and the deposit facility rate at -0.4%.
    Mario Draghi said in his introduction that the ECB expect them to stay at current or at lower levels for an extended period of time.
  2. Negative interest rates have had positive effects on financial conditions
  3. Interest rates will be higher only when growth and inflation will be higher
  4. Current outlook on economic activity is stronger but it is not enough yet
  5. The inflation situation is not as dire as before  but “now we have to be patient”. “We have to wait” as it was said buy the ECB president
  6. On a shorter view, Mario Draghi expects a negative inflation rate in coming months but a positive one in the second half of this year. At this time, the comparison with 2015, for the oil price, will be more favourable.
  7. The main point in the ECB action is to remain proactive, as it has been last March and before, to avoid a spillover of low inflation on wage and price settings. The risk of deflation would then be high.
  8. The ECB has not discussed the possibility of helicopter money. Draghi has not even discussed this possibility
  9. M. Draghi said that during the last four years, the ECB monetary policy was the only policy that has adopted a pro-growth profile.
  10. He said that the ECB was dependant on law not on politicians. He wanted to reaffirm the ECB independence after allusion from politicians in recent weeks.

Mario Draghi is waiting for the effects on its monetary policy on the economic activity and on the inflation rate. A lot of measures have been taken in recent months and specifically last March and they haven’t developed all their power yet. It will take time as the global environment is not supportive and cannot be a spontaneous support for the Euro Area.
The ECB has decided to maintain its accommodative stance on monetary policy. Therefore, interest rates will remain low for an extended period. Mario Draghi has not not excluded lower rates even if it’s not a issue now. The current stance is a pause.

The ECB has given details on the purchase of corporate assets. 5 points to keep in mind

  1. The asset is not from a bank or from a company owned by a bank
  2. But a paper issued by a company that owned a bank is eligible
  3. The paper has to be issued in euro
  4. The maturity of the paper will be between 6 months and 30 years
  5. The ECB will be able to intervene on the primary or/and the secondary markets.

The Euro Area’s New Momentum

Article that was published in the June Issue of International Banker
It is available online here

The good surprise in 2015 and the next two years will probably come from the Euro Area. After a long period of stagnation during which the level of economic activity remained unchanged, we can have expectations for a stronger trajectory. GDP growth will probably converge to 2 percent next year and will be higher in 2017. The strategy has dramatically changed since last spring with the implementation of a new and non-orthodox monetary policy. The ECB (European Central Bank) wants to create an impulse that will change the Eurozone’s momentum. That’s an important issue as it completely changes the perspective.

Four points to notice to explain this long period of stagnation 

  • The strategy since 2011 has been based on the idea that the adjustment had to be done at a country level. This was the consequence of an incomplete monetary union. For an optimal monetary area, it is necessary to have an endogenous mode of adjustment. Usually it goes through the labor market and/or the fiscal policy. The problem with European institutions was that such an adjustment was not possible. The sovereign-debt crisis was then perceived as a series of asymmetric shocks with an adjustment at the level of each country.

Continue reading

Weaker Euro is the ECB program ( September 4 meeting)

By lowering the refi rate at 0.05%, Mario Draghi said that the lower bound for ECB interest rates was reached. The deposit facility rate was also down 10 bp to -0.2% and the marginal lending facility dropped 10bp to 0.3%.
The first consequence of this measure is the flattening of the Euribor curve. The money market yield curve which was already at a very low-level will be reduced again. It will be anchored to the new level of 0.05% for the refi rate. For short-term maturities (3 month), the yield will be close to this level. Euro as a currency will become dramatically less attractive. This first measure must fix expectations of very low-interest rates for an extended period. Continue reading

Meeting of the ECB – What to expect?

My point on the ECB is the following
In June and in Jackson Hole Mario Draghi has made a lot of announcements. In June, at the ECB meeting, they were related to the ECB action only. In Jackson Hole he said that, alone, the ECB will not be able to manage the risk of deflation. In that case the ECB needs help from governments to support internal demand with a more active fiscal policy.
So Continue reading

Real Interest Rates and Growth – Euro Area 2009 – 2013

An interesting chart has been published on Bruegel’s blog (Bruegel is a Think Tank from Belgium see http://www.bruegel.org ). On one side of this chart there are real interest rates for Euro Area countries from 2009 to 2013 and on the other average growth numbers for the same countries on the same period. Spontaneously there is no causality but we see that on the period high real interest rates are associated with low growth performances. That’s a reason for Mario Draghi try to reduce fragmentation on financial market. Continue reading