$2.4 trillion stimulus is not enough for Eurozone, Mario Draghi said in the ECB monetary policy decisions conference on Thursday December 2016. According to ForexSQ experts the Euro decrease versus US dollar and other foreign currencies in forex trading market. The ECB interest rates unchanged.
ECB Monetary Policy Decisions Draghi Speech Dec 2016
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The European Central Bank caught financial markets off-guard on Thursday by announcing it would trim asset buys from April next year, even as it reserved the right to increase purchases again if the euro zone’s recovery faltered.
The ECB said it would cut monthly purchases to 60 billion euros from the current 80 billion euros but extend the buys until the end of 2017. Markets had expected purchases to stay at 80 billion but only for 6 more months, suggesting a compromise between hawks and doves in the Governing Council.
The euro initially jumped to a three-week high after the announcement, but quickly retreated to be flat on the day. Bond yields across the single currency area also rose, but pared gains later.
“The bank has extended its quantitative easing program until December which is more than what the market was expecting,” said Naeem Aslam, chief market analyst at ThinkMarkets
“However, the bank is going to reduce their firepower after March and will only be purchasing 60 billion. So you can say that the bank is tapering in a more dovish way.”
European Central Bank President Mario Draghi made clear, however, that he was not offering an outright winding-down of the program.
“There was no discussion of tapering today,” he said at a news conference. “A sustained presence is also the message of today’s decision.”
The bank was also firm about the new plan could and would be reversed if required.
“If, in the meantime, the outlook becomes less favorable or if financial conditions become inconsistent with further progress towards a sustained adjustment of the path of inflation, the Governing Council intends to increase the program in terms of size and/or duration,” Draghi said, reading from the Council’s statement.
“Uncertainty prevails everywhere. .. This is the reason for that sentence in the introductory statement,” he told a news conference after a decision he called “pragmatic and flexible”.
The bank confirmed it would loosen rules for its purchases to ensure the program continued smoothly, notably broadening the maturity range for eligible securities and permitting purchases of bonds yielding below the ECB’s deposit rate.
With high risk elections looming in four of the euro zone’s five biggest economies, the ECB was fully expected to keep the asset buys going, likely fearing that cutting back prematurely could abort a still timid recovery in the euro zone.
But as much of its firepower is exhausted and conservative member states, particularly Germany, grow frustrated with its unprecedented stimulus, the ECB was under pressure to cut back.
The ECB has already spent more than 1.4 trillion euros ($1.5 trillion) buying bonds and has been at pains to emphasize that maintaining easy financing conditions is ‘crucial’, with underlying inflation stuck below 1 percent.
Interest rates, seen by most to have bottomed out, were kept unchanged, with the deposit rate kept deep in negative territory.
The ECB maintained its inflation forecast at 0.2 percent this year, raising it slightly to 1.3 percent next year and said it saw inflation at 1.5 percent in 2018, just below the 1.6 percent it forecast in September.
Asked if its 2019 inflation project of 1.7 percent met its goal of below but close to two percent, Draghi said: “Not really, so we have to persist.”
Euro zone economic growth is shrugging off Britain’s decision to leave the European Union, and Germany, the bloc’s growth engine, seems to be picking up speed again.
Ironically, the collapse of Italy’s government this week may hasten instead of delay the recapitalization of ailing lender Monte dei Paschi, much to the ECB’s relief. It has pointed to weak banks as an obstacle to transmitting stimulus.
“The vulnerabilities that both the banking system and Italy have been there for a long time. And so they ought to be coped with, and I am confident the government knows what to do and they will be dealt with,” Draghi said.
But beneath the surface, the outlook is far from comforting.
The inflation rise is almost entirely due to past declines in oil price being knocked out of statistics. Underlying inflation is flat, if not slowing, suggesting that price growth is far from sustainable, a key condition for removing stimulus.
Wage growth has also disappointed, suggesting that companies have cut their inflation expectations. This is a hard-to-break cycle that could entrench anemic price growth, making it harder to get it back to the desired at-or-just-below 2 percent.
Even consumption, the key driver of growth is not as good as it looks. Consumption has been driven a jump in disposable income due to oil price falls and loose ECB policy. But Brent crude LCOc1 is up 14 percent in the past three months, leaving monetary policy as the chief driver of consumption.
The rising clout of populist parties could also weaken governments’ resolve to push ahead with painful but needed reforms. Elections in France, Germany, the Netherlands and possibly Italy could leave the ECB with more of the burden.
Even if many of the ECB’s fresh economic forecasts will be broadly unchanged from three months ago, the projection for underlying inflation is likely to be cut, a sign that the rise in inflation may be temporary.
Mario Draghi Says $2.4 Trillion Stimulus May Not Be Enough for ECB
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Mario Draghi warned that the region’s feeble inflation outlook means European Central Bank stimulus won’t end any time soon.
“The presence of the ECB on markets will be there for a long time,” the institution’s president said in Frankfurt after the Governing Council agreed to add more than half a trillion euros to its bond-buying program and extend it until at least the end of 2017. Quantitative easing is “in a sense open-ended, it’s state-contingent,” he said.
Draghi cited weak underlying price pressures, political uncertainties and inadequate government reforms as he laid out the reasons for expanding the ECB’s asset-purchase plan to at least 2.3 trillion euros ($2.4 trillion). He and his colleagues have frequently stressed that the euro area’s economic upturn is largely reliant on continued monetary easing as governments fail to play their part.
“I heard a dovish message,” said Holger Sandte, senior European economist at Nordea Markets in Copenhagen. “He’s basically saying that the next tapering is coming only in 2018.”
The market reaction suggested confusion among investors, who initially focused on a reduction in bond buying to 60 billion euros a month starting in April from 80 billion euros currently — interpreting the ECB as being hawkish. The euro was down 1.4 percent at $1.0606 at 5:21 p.m. Frankfurt time, while German 10-year bonds climbed to the highest since January and two-year notes rallied before giving up gains.
Draghi said new staff economic projections showing euro-area inflation averaging 1.7 percent in 2019 were “not really” close to the central bank’s goal of just under 2 percent. He also reiterated the ECB’s line that the economic outlook remains subject to downside risks.
Most economists surveyed by Bloomberg had predicted QE would be prolonged after March at the current pace for about six months. While the Governing Council considered such a scenario, there was “very broad consensus” for the option that prevailed. The ECB kept its main refinancing rate unchanged at zero and the deposit rate at minus 0.4 percent and didn’t discuss tapering — or a phased reduction of bond purchases to zero.
“The ECB and Mario Draghi did their best to confuse markets by feeding both the hawks and the doves,” said Jim Smigiel, chief investment officer for alternative strategies at SEI Investments. “We see the market’s obsession with a ‘taper’ as being misplaced and view this as a strong commitment to the current extraordinary monetary policy.”
The extension will be accompanied by adjustments to the program’s rules, a move necessary to avoid running out of assets to buy. Central banks will be allowed to buy debt with a yield below the deposit rate, previously a minimum eligibility requirement. The minimum duration of debt was lowered to one year from two years.
Issue Limits
Many economists had also predicted the ECB would increase the share of bonds it could buy to as much as 50 percent. Most issue and issuer limits are set at 33 percent. Draghi cited “an increasing awareness of legal and institutional constraints” for not taking that step.
He reiterated his call for governments to implement structural reforms that can cement the recovery, saying that political concerns are no excuse. Germany, France and the Netherlands all have elections in 2017, following on from political upsets in the U.K. and Italy — as well as the U.S. — this year.
“Countries that need reforms need to undertake them regardless of what is the general political uncertainty,” he said. “The best way to deal with uncertainty is to restore growth, job creation.”
While Draghi said the risk of deflation has largely disappeared, annual price growth is still only 0.6 percent. Inflation hasn’t been in line with the ECB’s goal since early 2013, with forecasts repeatedly being lowered. With that in mind, Draghi said policy makers haven’t discussed how they would react to better-than-expected economic data.
“We seem to be far away from any such high-class problem.” he said. “There are no signs yet of a convincing upward trend in underlying inflation.” ForexSQ use Reuters and Bloomberg as source.
