The ECB announced its October interest rate decision on Thursday, and they held everything where it is once again.
Analysts weren’t expecting a change in rates, but ECB President Mario Draghi’s comments at the press conference afterwards were far more interesting.
Here’s what he said:
- This is the full text of his introductory statement.
- Draghi said that the ECB’s quantitative easing programme is having a “favourable impact,” and that it’s “proceeding smoothly.”
- He flagged up that concerns over emerging markets, and commodity markets signal downside risks.
- Most importantly, he noted that “monetary accommodation” — or QE — will be “re-examined” in December. That’s dovish. The euro is pretty much took that as a sign that the bazooka is being primed.
Here’s how the euro looked immediately after the announcement. It fell by slightly more than 1% against the dollar:
- Draghi banged the drum once again for more structural economic reform in the eurozone, but the big news here is that the ECB is taking a look at the level of monetary policy accommodation again.
- He said it’s not about “wait and see” but “work and assess.” It now seems incredibly unlikely that the ECB will not ease in some way in December.
- Interest rate cuts were discussed at the most recent meeting, unlike the meetings before that.
- Brian Blackstone from the Wall Street Journal got a bit of a rant from vice president Vitor Constancio, after a question about whether the eurozone will get bogged down in an endless QE programme.
Since late 2014, the ECB’s deposit rate has been at -0.20%, and its refinancing rate at 0.05%. All the communication so far has suggested that it won’t go much further into negative territory — so Thursday’s revelation that it was discussed is important.
Inflation is still low. even core inflation, which strips out the effect of the recent oil price plunge, is at just 0.9%. The ECB’s target for inflation near but just below 2% isn’t being met.
For its QE programme, the ECB is currently aiming to purchase €60 billion ($US67.91 billion or £43.85 billion) in assets per month, until at least September 2016, or until there’s an appreciable pick-up in inflation and inflation expectations.
It could choose to raise that figure, broaden what assets it can purchase, extend the maturities of the purchases, or extend the period for which it intends to buy the securities (mostly government bonds). Basically, the QE programme could still definitely be stepped up.
In September ECB President Mario Draghi spoke at the European Parliament, suggesting that he was monitoring financial and monetary conditions in the eurozone closely for any signs that they’re tightening.
With increased financial market volatility over recent months, conditions have tightened, but not by too much. Here’s what the euro area’s monetary conditions index looks like: