The ECB President Mario Draghi leaves key deposit rate unchanged and continues asset purchases at 80B euros per month on Thursday, ForexSQ experts say Forex and stock markets disappoints.
ECB President Mario Draghi Disappoints Forex Market
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European Central Bank President Mario Draghi said on Thursday the bank was looking at options to ensure it could pursue its unprecedented money-printing program, with euro zone inflation still way below its official target.
However the bank stopped short of confirming a specific extension of its 80-billion-euro monthly asset purchases, reaffirming its existing line that they would continue until next March or beyond if necessary.
“The Governing Council tasked the relevant committees (with the ECB) to evaluate the options that ensure a smooth implementation of our purchase program,” he told a news conference after the policy-making council kept its key interest rates on hold.
Draghi unveiled a modest downgrade of the bank’s euro zone growth forecasts warned of downside risks, among them Brexit-related uncertainty, but said no action was required for now.
“For the time being, the changes are not substantial to warrant a decision to act. We see that our monetary policy is effective,” he said.
The ECB kept its deposit rate at -0.4 percent, charging banks for parking cash overnight, and held the main refinancing rate, which determines the cost of credit in the economy, unchanged at 0.00 percent.
The euro hit a two-week high, bond yields across the euro zone rose and stock markets in the region fell on his confirmation that an extension of the central bank’s asset-purchase program was not discussed at the meeting.
Keeping rates deep in negative territory and printing money at a record pace, the ECB is hoping to revive inflation and growth in a region weighed down by nearly a decade of economic malaise and crises.
After 18 consecutive months of buying government bonds to pump up the economy and raise inflation, the European Central Bank’s holdings hit a landmark 1 trillion euros last week — yet prices are seen rising a mere 0.2 percent this year, well below its target of near two percent.
What must change
Prolonging the purchases is controversial because it risks further distorting market prices and even running out of eligible bonds. The ECB has already had to stop purchases in Estonia and found no bonds to buy in Luxembourg last month.
That has led to increasing speculation that it will have to adapt the rules of its asset purchase program to provide even more stimulus, as it is widely expected to do before year-end.
The choice is then between tweaking purchase rules or going for a bigger redesign.
Easiest options could include buying bonds yielding less than the bank’s -0.4 percent deposit rate, extending the maturity range of eligible bonds to 30 years from 20 years and buying an even bigger portion of certain bond issues.
Bigger changes could involve the purchase of new types of assets, like bank bonds, non performing loans or in the extreme case, stocks.
Still, each of these changes would generate concern or even outright opposition from the hawks and the growing camp of moderates on the Governing Council, who worry about the unintended negative effects of the ECB’s extraordinary stimulus.
The ECB slightly upgraded its euro zone growth forecast to 1.7 percent from 1.6 percent this year, but downgraded it to 1.6 percent from 1.7 percent for both 2017 and 2018. Its forecast for a modest takeoff in inflation to 1.2 percent next year and 1.6 percent in 2018 were barely changed.
Draghi had his usual stern words to say on the structural reform efforts of the region’s governments, describing them as in need to be “substantially stepped up” to raise productivity, improve the business environment, and boost infrastructure.
“Fiscal policies should also support the economic recovery,” he said, repeating a message made by central bankers at the annual Jackson Hole gathering this year but which has seen only little take-up so far in Europe.
Draghi Orders ECB to Review QE Program Amid Bond Scarcity
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Mario Draghi said European Central Bank officials will study options to ensure their quantitative-easing program doesn’t run out of bonds to buy as he played down the need to commit to new stimulus for now.
“The assessment was that for the time being the changes are not substantial as to warrant a decision to act,” the ECB president said at a press conference in Frankfurt on Thursday. “The main theme was to make sure that the program and decisions we took in March can be implemented in the new constellation of interest rates, which clearly have restricted the eligibility universe.”
With six months to go until the scheduled end of its QE program, the ECB needs to balance increasing concerns about asset scarcity with signs that the region’s recovery is losing momentum. The central bank has missed its target of keeping inflation just under two percent for over three years and doesn’t foresee reaching it before late 2018.
The 25-member Governing Council earlier kept its main refinancing rate at zero, the deposit rate at minus 0.4 percent and asset purchases at around 80 billion euros ($90 billion) a month until March 2017. Draghi denied that officials discussed an extension of the stimulus during their meeting, and declined to give a view on so-called helicopter money because they haven’t talked about it either.
Full Mandate
“The Governing Council tasked the relevant committees to evaluate the options that ensure a smooth implementation of the purchase program,” Draghi said, without divulging further details of what they might consider. “The committees have full mandate. They will look at all the options that might be used to redesign the program, and then of course we’ll have a discussion in the Governing Council.”
While he stressed that policy makers didn’t discuss the possibility of extending the duration of QE beyond its scheduled end of March 2016, the ECB president reaffirmed the Governing Council’s “unanimous” commitment to carry out current stimulus until it sees a “sustained adjustment in the path of inflation consistent with its inflation aim.”
The ECB confirmed its outlook for price growth in 2018 at 1.6 percent, while slightly cutting the 2017 outlook to 1.2 percent from 1.3 percent. It also revised down forecasts for euro-area growth in 2017 and 2018 to 1.6 percent from 1.7 percent, while raising the prediction for the current year to 1.7 percent from 1.6 percent.
“We see that our monetary policy is effective, we see that its full impact is now in the macroeconomic projections, but we also see that there have been considerable decreases in all interest rates,” Draghi said. “Available evidence so far suggests resilience of the euro area economy to political and economic uncertainties.”
Growth in the region slowed to 0.3 percent in the second quarter after expanding 0.5 percent in the three months through March. Inflation was just 0.2 percent in August, lower than anticipated and unchanged from July. A purchasing-managers survey by IHS Markit signaled economic activity in the 19-nation bloc was at its weakest in 19 months.
“We continue to expect to continue real GDP to grow at a moderate but steady pace,” Draghi said in his opening statement. “The economic recovery in the euro area is expected to be dampened by subdued foreign demand, partly related to uncertainty surrounding U.K. referendum.” The ForexSQ experts team use Reuters and Bloomberg as source to write this article.
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