Big day for central bankers
If you’re a central bank geek (or more generally, someone interested in the world economy), you’ve come to the right place. The FT is hosting a live blog double header, bringing you first the Turkish rate call, and then the ECB one that will follow 45 minutes later.
Reporters in Istanbul, Frankfurt and London will be bringing you the latest developments on what is expected to be an exciting day.
Here’s a look at how the day will play out:
12: Turkish central bank decision
12:45: ECB decision
13:30: Mr Draghi’s press conference
Mario Draghi and the ECB meeting – FT editorial
Some preparation reading for you:
Mario Draghi’s penultimate meeting as president of the European Central Bank will rank among the most important in his eight-year tenure, says the Financial Times in its editorial.
Read it here:
Interest rates: First Turkey then Draghi and the ECB
The ECB may be today’s main event, but emerging market investors will also be closely watching an interest rate decision in Turkey, writes Laura Pitel.
Analysts are expecting another big cut after a whopping reduction of 4.25 percentage points in the benchmark rate in July.
Turkey’s economy is still recovering from last year’s painful currency crisis. But President Recep Tayyip Erdogan has made clear that he is eager to return to fast-paced growth as soon as possible.
He wants to achieve that by bringing rates down quickly. A dispute over the pace of rate cuts culminated in the sacking of former central bank Murat Cetinkaya over the summer. His successor, Murat Uysal, slashed the policy rate from 24 per cent to 19.75 per cent shortly after taking up the role.
Economists worry that cutting rates too fast could spark a fresh surge in inflation, reversing the downward trend of recent months. But, controversially, the Turkish president believes that lowering interest rates will lead to lower inflation. “After it falls to single digits, inflation will also slow to single digits,” he said on Sunday, as he vowed to lower the policy rate to single digits “in the shortest period”.
Turkish interest-rate forecasts vary wildly
A Bloomberg survey of economists ahead of Thursday’s decision in Turkey produced a consensus forecast of a 275 basis-point cut. That would bring the benchmark one-week repo rate down from 19.75 per cent to 17 per cent, writes Laura Pitel.
But, in a sign of how unpredictable the rate-setter has become, there is huge variation in expectations.
Muhammet Mercan, the chief economist for Turkey at ING bank, predicts a relatively modest cut of 175 basis points. The consultancy Teneo expects a cut of around 375-400bps.
Commerzbank plumps for a prediction of 250bps but the bank’s analyst, Tatha Ghose, admits that this figure is a guess.
“We have no specific argument why it won’t be 300bps or 400bps,” he says, adding that it all depends on “whether new [central bank] governor Murat Uysal will exercise some independence and cut by a moderate amount, or will cave in before President [Recep Tayyip] Erdogan’s threats and cut by a large step”.
Turkey’s inflation causes concern as it could accelerate again
Turkey’s inflation soared after last year’s plunge in the value of the lira, writes Laura Pitel.
The rate peaked in October at 25 per cent — five times the bank’s official 5 per cent inflation target.
The pace of price rises has been slowing steadily in recent months, thanks mainly to the central bank’s decision to increase its main interest rate sharply to 24 per cent after a 2018 currency crisis. Inflation slowed to a 15-month low of 15 per cent in June, and may even fall to single digits in September.
This has been welcomed by economists, as well as by Turkish citizens who have been grappling with rising shopping bills and utility costs.
But many analysts are worried that inflation could start rising again — and that slashing interest rates would make that problem worse. Goldman Sachs said in a recent note that a “sustained disinflation trend is not yet under way” and warned that cutting rates too fast could lead to a fresh bout of currency volatility.
ECB meeting set to be one of the most unpredictable for a long time
The central bank seems all but certain to launch a fresh stimulus package today, to prop up inflation and stop a slump in manufacturing spreading to services.
But it’s not at all clear how much stimulus the more hawkish members of the governing council will be prepared to support.
Here’s a guide to what’s a stake from the FT’s new Frankfurt bureau chief, Martin Arnold.
It’s the details of the ECB decision that will matter
At minimum, the governing council is likely to cut interest rates further into negative territory and strengthen its forward guidance that they are likely to stay low. The question is whether they will opt for a 20bp point cut, taking the main deposit rate to -0.6 per cent – or for a more modest 10bp move.
This could be accompanied by a new tiering system – exempting a portion of banks’ excess deposits from negative rates – to lessen the hit to banks.
More contentious is the decision on whether to relaunch QE. A hawkish minority on the governing council has made its opposition clear – but having raised investors’ expectations of a big package, the ECB could see a big market backlash if it fails to follow through.
To make a big round of QE credible, though, the ECB may also need to increase the “issuer limit” – the one third cap on the proportion of outstanding bonds of any single member state it can buy.
Investors have scaled back their expectations of ECB stimulus
After some hawkish commentary from governing council members over the past week, expectations on the size of stimulus have come down a little. Economists at RBC Capital Markets say markets are pricing in a probability of a 10bp rate cut, but only a one in three chance of a 20bp move – and betting on a relaunch of asset purchases at a rate of around Eur 30-40 bn a month.
Lira steady ahead of Turkey rate decision
It is steady as she goes for the Turkish lira as investors eagerly await the Turkish central bank’s rate decision, due in about 15 minutes.
A US dollar fetches 5.74 lira at the moment, an improvement from this spring when the dollar climbed above TL6.24.
Cristian Maggio at TD Securities sees today playing out as such:
The lira stands more than 50 per cent chance to sell off immediately after the CBRT announcement if the MPC delivers more than 300bps of easing. The correction in USDTRY could be around 0.8-1.2 per cent, but, similarly to the 25 July announcement, the pair could close lower on 12 September unless the CBRT cuts significantly more than 400bps. If the CBRT cuts 300bps or less, we expect the lira to respond positively and strengthen vs USD.
Turkish central bank cuts rates by 325 basis points
Laura Pitel reports from Istanbul:
Turkey has slashed its benchmark interest rate by 3.25 percentage points, bringing it down from 19.75 per cent to 16.5 per cent.
The cut is bigger than the predictions of economists surveyed by Bloomberg, who had forecast a cut of 275 basis points.
Lira climbs 1%
The lira is rising against the dollar after Turkey cut rates by a little bit more than forecast.
Turkey’s lira was recently up 1.2 per cent on the dollar at TL5.67.
Turkey’s cut on Thursday means rate lowered by 750bp since July
Turkey 3.25 percentage-point cut to its benchmark interest rate means that Turkey’s central bank has lowered its policy rate by a total of 750 basis points since July, when governor Murat Uysal took to its helm, writes Laura Pitel.
Mr Uysal’s predecessor was sacked by president Recep Tayyip Erdogan, an opponent of high interest rates, following a dispute over the pace and depth of rate cuts.
Full text: Turkish rate decision
Here is the full Turkish central bank rate decision, as published on Thursday:
Participating Committee Members
Murat Uysal (Governor), Murat Çetinkaya, Ömer Duman, Uğur Namık Küçük, Oğuzhan Özbaş, Emrah Şener, Abdullah Yavaş.
The Monetary Policy Committee (the Committee) has decided to reduce the policy rate (one-week repo auction rate) from 19.75 percent to 16.50 percent.
Recently released data indicate that moderate recovery in economic activity continues. In the first half of the year, the contribution of net exports to economic growth continued, while investment demand remained weak and the contribution of private consumption gradually increased. Goods and services exports continue to display an upward trend despite the weakening in the global economic outlook, indicating improved competitiveness. In particular, strong tourism revenues support the economic activity through direct and indirect channels. Leading indicators point to a partial improvement in the sectoral diffusion of economic activity. Looking forward, net exports are expected to contribute to economic growth and the gradual recovery is likely to continue with the help of the disinflation trend and the improvement in financial conditions. The composition of growth is having a positive impact on the external balance. Current account balance is expected to maintain its improving trend.
Recently, advanced economy central banks have started to adopt more expansionary policies as global economic activity weakened and downside risks to inflation heightened. While these developments support the demand for emerging market assets and the risk appetite, rising protectionism and uncertainty regarding global economic policies are closely monitored in terms of their impact on both capital flows and international trade.
Inflation outlook continued to improve. In addition to the stable course of the Turkish lira, improvement in inflation expectations and mild domestic demand conditions supported the disinflation in core indicators. In August, consumer inflation displayed a significant fall with the contribution of core goods, energy and food groups. Domestic demand conditions and the level of monetary tightness continue to support disinflation. Underlying trend indicators, supply side factors, and import prices lead to an improvement in the inflation outlook. In light of these developments, recent forecast revisions suggest that inflation is likely to materialize slightly below the projections of the July Inflation Report by the end of the year. Accordingly, considering all the factors affecting inflation outlook, the Committee decided to reduce the policy rate by 325 basis points. At this point, the current monetary policy stance, to a large part, is considered to be consistent with the projected disinflation path.
The Committee assesses that maintaining a sustained disinflation process is the key for achieving lower sovereign risk, lower long-term interest rates, and stronger economic recovery. Keeping the disinflation process in track with the targeted path requires the continuation of a cautious monetary stance. In this respect, the extent of the monetary tightness will be determined by considering the indicators of the underlying inflation trend to ensure the continuation of the disinflation process. The Central Bank will continue to use all available instruments in pursuit of the price stability and financial stability objectives.
It should be emphasized that any new data or information may lead the Committee to revise its stance.
The summary of the Monetary Policy Committee Meeting will be released within five working days.
A few sarcastic comments on the Turkish rate decision circulating on twitter
“I love how in cutting policy rates 325bps, the CBRT argues the need for a cautious monetary stance,” says Tim Ash, a strategist at BlueBay Asset Management
Mixed expectations: Why the lira may be rallying
The Turkish rate cut was deeper than the consensus of economists polled by Reuters (3.25 percentage points vs expected 2.5 pp). However, Paul McNamara at GAM points out that there had been “a lot of talk” among investors that there would be an even deeper 4 pp plus cut.
Erik Meyersson, senior economist at Handelsbanken, adds the reduction was “more than expected by forecast economists (including myself), less than expected by investors.”
Improving inflation outlook key in rate decision
Outlining the thinking behind the cut – which was slightly more aggressive than generally anticipated, but well off the extreme slashes suggested by some – the central bank’s committee members pointed to the improving inflation outlook:
Inflation outlook continued to improve. In addition to the stable course of the Turkish lira, improvement in inflation expectations and mild domestic demand conditions supported the disinflation in core indicators.
They also cited a continuing “moderate recovery” in economic activity:
In the first half of the year, the contribution of net exports to economic growth continued, while investment demand remained weak and the contribution of private consumption gradually increased.
Cut well off the extremes expected in some quarters
Expectations ahead of the decision had varied wildly, notes Laura Pitel. The actual decision was far from the extremes some had suggested.
The speculation of a deeper cut was fuelled by a story in the pro-government newspaper Yeni Safak, which had suggested a 500 basis point cut was coming down the track.
What Turkey’s currency did after central bank lowered borrowing costs
All eyes on Frankfurt
As market watchers turn their gaze from Ankara to Frankfurt, where a rate decision and outlook are set to be announced by the ECB at 1:45pm local time (12:45pm London time), what are Mario Draghi’s options?
The folks at ING have mapped out the alternatives in this handy grid:
Whatever route Mr Draghi chooses, analysts at the bank say it is difficult to predict exactly how markets will respond:
Disentangling market reaction to the various parts of a policy package is notoriously difficult, and might indeed be one of the points of unveiling them as a package in the first place.
Background reading on challenge Draghi is grappling with
Krishna Guha, vice-chairman of the broker-dealer Evercore ISI, argues on Alphaville that the ECB needs to make fundamental changes in the way it conducts policy to bolster the credibility of its inflation target.
Here we go…
The ECB decision is due in just about a minute.
This looks to be on a fairly modest scale
The ECB has voted for a cut of 10 basis points in the deposit rate – rather than the 20bp some had been expecting. There will be a new tiering system, as expected – but details are to come later.
Monthly asset purchases of €20bn will also disappoint market expectations.
ECB cuts deposit rate, restarts asset purchases
The decision is out, and the statement from the ECB is here.
In short, the central bank has opted to cut the deposit rate by 0.1 percentage points, which is less than the market had been expecting. Cue a very short-lived rally in the euro.
It has also decided to restart asset purchases to the tune of EUR20bn a month from November.
Plus, we have a tweak to the TLTRO “to preserve favourable bank lending conditions”
There is a change in the forward guidance though
The Governing Council now expects the key ECB interest rates to remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2% within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics.
The previous wording, in the July statement, was that rates would stay on hold “at least through the first half of 2020, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to its aim over the medium term.”
Full statement from the ECB
At today’s meeting the Governing Council of the ECB took the following monetary policy decisions:
(1) The interest rate on the deposit facility will be decreased by 10 basis points to -0.50%. The interest rate on the main refinancing operations and the rate on the marginal lending facility will remain unchanged at their current levels of 0.00% and 0.25% respectively. The Governing Council now expects the key ECB interest rates to remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2% within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics.
(2) Net purchases will be restarted under the Governing Council’s asset purchase programme (APP) at a monthly pace of €20 billion as from 1 November. The Governing Council expects them to run for as long as necessary to reinforce the accommodative impact of its policy rates, and to end shortly before it starts raising the key ECB interest rates.
(3) Reinvestments of the principal payments from maturing securities purchased under the APP will continue, in full, for an extended period of time past the date when the Governing Council starts raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.
(4) The modalities of the new series of quarterly targeted longer-term refinancing operations (TLTRO III) will be changed to preserve favourable bank lending conditions, ensure the smooth transmission of monetary policy and further support the accommodative stance of monetary policy. The interest rate in each operation will now be set at the level of the average rate applied in the Eurosystem’s main refinancing operations over the life of the respective TLTRO. For banks whose eligible net lending exceeds a benchmark, the rate applied in TLTRO III operations will be lower, and can be as low as the average interest rate on the deposit facility prevailing over the life of the operation. The maturity of the operations will be extended from two to three years.
(5) In order to support the bank-based transmission of monetary policy, a two-tier system for reserve remuneration will be introduced, in which part of banks’ holdings of excess liquidity will be exempt from the negative deposit facility rate.
Separate press releases with further details of the measures taken by the Governing Council will be published this afternoon at 15:30 CET.
The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 14:30 CET today.
Euro slightly lower after announcement
The euro dropped slightly after the ECB’s statement, giving up earlier gains to trade down around 0.3 per cent against the dollar at $1.0978.
European government bonds rally after ECB decision
Bonds across the eurozone (and elsewhere in the region and globally) are enjoying a significant price rise after the ECB said it would restart its bond purchasing programme, sending yields lower.
Here’s a quick snapshot of paper with a 10-year maturity:
-Germany: -7.1 bp to -0.638 per cent
-France: -10.4 bp to -0.37 per cent
-Spain: -8.2 bp to 0.18 per cent
-Italy: -16.5 bp to 0.819 per cent
-UK: -5.9 bp to 0.58 per cent
-US: -4.4 bp to 1.687 per cent
Bank stocks bumped up
It was hard for the ECB to go beyond super-charged market expectations for its decision today, but it seems to have managed it, with a hit to the euro and a rally in fixed income.
It is worth bearing in mind that this is all to play for at the press conference in half an hour. It is not at all unusual for immediate market reactions to unwind.
Still, one other corner of markets feeling the glow is bank stocks, which are getting a lift.
Gainers include UniCredit, up 1.5%, Deutsche Bank (+1.2%) and Santander (+0.9%)
This is because the ECB has taken steps to dampen the impact of the cut in deposit rates for lenders, addressing a concern that has been top of mind for central bankers seeking to avoid doing more harm than good.
As it said in its statement, “a two-tier system for reserve remuneration will be introduced, in which part of banks’ holdings of excess liquidity will be exempt from the negative deposit facility rate.”
Stay tuned for details on exactly how this will work.
A key change is that both low rates and QE are now open-ended in timing
That’s a point flagged up by Carsten Brzeski at ING, who also has this to say
This is Mario Draghi’s final “whatever it takes”. Depsite all market excitement now, the question remains whether this will be enough to get growth and inflation back on track as the real elephant in the room is fiscal policy. It is clear that without fiscal stimulus, Draghi’s final stunt will not necessarily lead to a happy end.
Gold rallied after the ECB announcement, gaining 1.3 per cent on the day to trade at $1,516, with investors moving into the haven asset, which provides no yield, as the central bank cut rates and increased its cautious tone.
The yellow metal – seen as a safer asset in times of turbulence – has been on a roll this year as bond yields shift into the negative and economic growth fades.
Analysts at Citi suggested earlier this week that the price of gold could hit a record high of $2,000 an ounce within the next two years amid a lower interest rate environment and fears of a downturn.
More questions for Draghi
The headlines point to the European Central Bank not holding back, with Draghi getting his way one last time, says Marchel Alexandrovich, senior European economist at Jefferies.
What the monetary policy decision statement does not mention is how generous the tiering system is, the precise mix of assets the new QE programme will contain (no indication that the corporate bond purchase programme will expand to include bank debt; but who knows?), and whether the ECB raised the issuer limit on its sovereign bond purchases.
“Those will be the questions for Draghi in the Q&A, with the exact details likely to be published after he finishes speaking,” he said.
From here on out, these technical details will be key in terms of judging the overall generosity of the ECB’s offering.
Donald Trump weighs in…
Donald Trump has given his first take on today’s ECB rate cut, saying the central bank is “trying and succeeding in depreciating the euro against the very strong dollar, hurting US exports.”
In what has become a regular occurrence, the US president has used the opportunity to again criticise the Federal Reserve: “And the Fed sits, and sits, and sits. They [eurozone sovereigns?] get paid to borrow money, while we are paying interest!”
Here is Mr Trump’s full tweet:
EU stresses financial stability risks of low rates
With perfect timing, the European Union’s three financial supervisors announced that the prolonged low-interest rate environment was one of the biggest threats to financial stability across the bloc, along with a risk of no-deal Brexit, writes Caroline Binham in London.
On the same day as the European Central Bank cut interest rates for the first time since 2016 and restarted its Quantitative Easing programme, the Joint Committee of the three European Supervisory Authorities warned on Thursday that the prolonged low-interest environment was continuing to put pressure on the financial sector, which was responding with potentially risky behaviour.
“While the monetary policy response to weakening growth and inflation outlook has helped restore the confidence in the financial markets in the short term, over the medium term persistently low interest rates, combined with flattening yield curves, put pressure on the profitability and returns of financial institutions, incentivise search-for-yield strategies and increase valuation risks,” reads the committee’s report on the key risks to the EU’s financial system.
It highlighted investment funds that are hungry for yield, with some suffering as they try to match demands from investors to redeem against their investments in illiquid assets. The issue came to the fore earlier this summer with the rapid deterioration in the UK of Neil Woodford’s flagship equity fund.
Low interest rates, continuing uncertainty over Brexit, global trade wars and increasing indebtedness were the key risks to the bloc’s financial stability that the committee highlighted on Thursday. It also detailed leveraged loans and climate change.
The committee is made up of the European Banking Authority, the European Securities and Markets Authority, and the European Insurance and Occupational Pensions Authority.
Mario Draghi press conference about to begin
Mario Draghi is about to take his seat at today’s ECB press conference. Investors will be keenly awaiting more information on the central bank’s stimulus plans.
As ever … traders (and journalists) will also be watching closely to see what tie Mr Draghi has chosen.
Here’s a live feed:
Going for broke
Mario Draghi is leaving the ECB presidency “with a bang” said Robert Sierra at Fitch Ratings.
Not only has the Bank cut the deposit rates by 10bp and introduced tiering for reserve remuneration but QE at €20bn per month will be undertaken on an open ended basis “for as long as necessary”.
With core inflation bogged down and inflation expectations having fallen sharply this year the ECB had to go for broke.
Draghi has begun speaking…
“The new easing package is comprehensive” – Hermes
Silvia Dall’Angelo, Senior Economist, Hermes Investment Management, is impressed:
“the ECB managed to surprise the market with an aggressive new package of easing measures, justified by the recent deterioration of the growth and inflation outlook. The new easing package is comprehensive.”
“While financial markets are loving the new round of accommodation, the impact on the real economy from the set of announced measures is uncertain”
The press conference has just kicked off. Stay tuned……
Euro still sinking…
Mario Draghi is making very sure to stress the forward guidance elements of the decision as the press conference kicks off.
The statement itself read:
“The Governing Council now expects the key ECB interest rates to remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2% within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics.”
The ECB president is also talking about a “more protracted weakness” of the eurozone economy.
The market is listening, with the euro extending losses to $1.0941 now, a shade lower than the immediate aftermath of the rates announcement.
Draghi says the decision reflects a worsening economic outlook
Staff forecasts are now for real GDP growth of 1.1% in 2019, 1.2 % in 2020 and 1.4 % in 2021, with risks tilted to the downside.
ECB has cut its forecasts for inflation
Draghi says headline inflation is likely to decline before rising again towards the end of the year. Inflation expectations are at low levels. Labour costs are rising but are not passing through to inflation as fast as expected.
Staff forecasts now foresee annual HICP inflation at 1.2% this year, 1.0% in 2020 and 1.5% in 2021.
Here are the ECB’s latest macro projections in chart form:
Fiscal policy is giving some support to the eurozone economy, Draghi says
But as usual, he underlines that governments with more fiscal space need to act. Which governments could he possibly have in mind?
Here’s Mario Draghi’s statement in full
Euro in heaviest fall since early July against dollar
The common currency’s fall has accelerated as Mario Draghi has said the eurozone economy has weakened more aggressively and persistently than the European Central Bank had forecast over the summer.
The euro is currently down around 0.73 per cent against the buck, which would be the worst day for the currency since July 1, according to Refinitiv data.
Thursday’s fall came as Mr Draghi outlined a new stimulus programme from the central bank that included the first rate cut since 2016 and the restarting of the bank’s bond buying scheme. It has knocked eurozone bond yields lower across the board, something that tends to be bearish for the currency.
The fall in the euro has been something that US President Donald Trump has repeatedly complained about in recent weeks. It will be interest to see whether he offers and further comments later today.
Draghi’s three reasons
As he opens the floor to questions from journalists, Mr Draghi has reiterated the three key reasons for today’s actions:
1. The “protracted slowdown” in the eurozone economy, which he says is “more marked than expected”.
2. The “persistence of downside risks” of both a trade and geopolitical nature.
3. The downward revision in projected inflation levels and the fact that current inflation remains muted.
Hard Brexit not in the forecasts
Draghi has pointed out that a hard Brexit, for which “the probability has probably gone up in recent times”, is not embedded in the baseline forecasts.
Even without that, he is sounding gloomy enough, pointing out that the decision today is down to a slowdown in the eurozone economy, “the persistence” of downside risks in global trade, and “the downward revision in inflation projections”.
The first question is on the “chemistry” of the meeting
Draghi says he prefers to explain first what was done. Even the ECB’s baseline forecasts are “relatively favourable”, he says, because it does not include the recent escalation in trade conflict or the risks of a hard Brexit. Even then the outlook for inflation is lower.
There is now no more “calendar dependence” in the guidance on interest rates. This should provide a good guide to policy by linking policy to the inflation outlook, Draghi says. But he adds that decisions won’t be taken on the back of short term fluctuations in inflation. The ECB has emphasised that convergence on the inflation target should be “robust” and that underlying inflation must be consistent with target.
“High time for fiscal policy to take charge”
Not so much a hint, but almost an instruction from Mr Draghi here, as he presses the case, even more forcefully than usual, for governments to take the strain.
“There was unanimity that fiscal policy should become the main instrument,” he said.
Now Draghi comes to the chemistry
There was unanimity on the rate cut, change in guidance and TLRO, he says. The difference in views on QE was well known, but there was a broad enough consensus not to need to put the decision to a vote.
The main differences of view were on the severity of the outlook, Draghi says.
The majority believed the outlook was worsening faster than expected. Others showed more caution. But the governing council decided to act now.
No discussion on changing marginal lending rates
Mr Draghi says there was no discussion on making changes to marginal lending rates.
There will be no change in the type of assets purchased under QE, Draghi says
Responding to a question from the FT’s Martin Arnold, Mr Draghi said:
There was no discussion about the type of assets, meaning that by and large it’s going to be the same as the type we purchased in the past.
Draghi says ECB has headroom to continue QE for ‘quite a long time’
Mario Draghi said the ECB has the ability to continue its bond-buying scheme for “quite a long time”, pushing back on concerns among some analysts that the bank would run-up on the limit of debt of any single country it can own.
The ECB president said: “we have relevant headroom to go on for quite a long time at this rhythm without having the discussion about limits,”
When the ECB launched QE four years ago, it imposed a one-third limit on the amount of outstanding bonds of any single member state that it could buy — known as the issuer limit. This was designed to prevent the ECB from holding enough of any one country’s debt to have the power to block a potential restructuring.
Additional reporting by Martin Arnold.
“We don’t target exchange rates, period”
That is Mario Draghi’s retort to Donald Trump.
Asked about the US president’s tweeted claims that the ECB is deliberately “depreciating the Euro against the VERY strong Dollar”, Mr Draghi said his mandate is about inflation, and not about the currency.
Still, Mr Trump is likely to remain irritated by the slide in the euro today. The currency is now down by 0.5% against the dollar at $1.0955.
Draghi is asked if he would want to review the inflation target
I’ve been asked this many times, he says. There are two different camps – those who say we are far from 1.9, so why not accept 1 per cent as an objective “cheerfully and happily” and claim victory. We’ve always rejected that.
Another camp says that if we raise our target to 4% people will believe you and their expectations will go up.
All this will be handled in the strategic review to be carried out by my successor.
But when you change a target you can’t reach the action is not very credible.
How would the ECB react if the US intervenes to weaken the dollar?
We stick with the G7 consensus, Draghi says. We will never pursue competitive devaluations. We expected all G20 members to abide by the consensus.
With today’s announcement, the ECB “fires another bazooka”, according to analysts at Fidelity International.
Rosie McMellin, fixed income portfolio manager at Fidelity, said that while the rate cut and amount of monthly purchases were short of market expectations, these factors were “more than outweighed” by the changes to the forward guidance and open-endedness of the measures.
The ECB announced a wide-ranging ‘easing’ package, including an 10bps cut to the deposit rate, bringing it to -50bps and the extension of its forward guidance.
The package includes a restart of quantitative easing (QE) , just nine months after the previous programme was halted, with the ECB planning monthly net asset purchase of EUR20bn for ‘as long as necessary’. The ECB also delivered on the widely expected introduction of tiered system of reserve remuneration, which is aimed at reducing the impact of negative rates on bank profitability.
While both the deposit cut and the amount of monthly purchases fall short of market expectations, this is more than outweighed by the changes to the forward guidance and open-endedness of the measures. Today’s package will likely reinvigorate the hunt for yield, and we would expect credit markets to rally.
Not blind to the side effects
Mr Draghi has taken a question about whether persistently easy monetary policy could end up having harmful, rather than beneficial, effects. He is keen to stress that the ECB is taking this risk seriously.
“I think this concern is very well placed,” he said. “We should be aware of the side effects of our policies, be they interest rates or asset purchase. We are closely monitoring the side effects we are keenly aware.”
For more on this topic, check out this column from Huw van Steenis on our pages.
Fiscal policy is the answer to anyone who worries about QE’s side effects
Draghi takes a question on whether QE is damaging pension funds. He points out that they gain too to the extent that negative rates speed up a recovery.
But if people now want to see a faster recovery so that interest rates can go up again, “the answer is fiscal policy”.
Probability of eurozone recession is small, but growing
Mr Draghi said the odds of a recession in the eurozone were on the rise:
We still think the probability of a recession for the euro area is small, but it’s gone up. But still we believe it’s a small probability
On Germany, he noted that two business cycle institutes had today suggested the country was either in recession or on the brink of one.
That’s a case for timely and effective action on the fiscal policy side.
One of the groups referred to by Mr Draghi, the Ifo Institute, this morning cut its forecast for German growth over the next two years. Read Martin Arnold’s report on this here.
Mohamed El-Erian gives Mario Draghi a ‘thumbs up’
Mohamed El-Erian, chief economic adviser at Allianz, said Mario Draghi was ” handling his press conference very well.” He appears pleased with the ECB chief’s use of “occasional humor”.
Mr El-Erian said:
He has minimised the risk of communication slips with careful words,sticking to a written text on particularly tricky issues,making clever use of historical references,and inserting occasional humor.
Banks should put the pressures of negative rates into perspective, Draghi says
People need to explain that negative rates are a necessity, he says. Trust in the ECB depends on whether it delivers on its mandate or not.
Draghi also notes that Germany’s financial system benefited from ECB policy for some time, significantly – and negative rates won’t cause the collapse of the financial system. Adapting to the really big shifts in digital technology will be a much bigger deal…
‘Negative rates will not provoke the collapse of the financial system’
Draghi dismissed banks’ misgivings about negative rates, slapping down a suggestion that they could “cause the collapse of the financial system”.
Banks would like to have positive rates unquestionably so whenever they have negative rates they don’t like it.
Banks should worry about other factors, he said, such as cost-income ratio and digitisation.
The necessity to adjust the business model to digitalisation, to changes in technology, is something much more compelling than being angry about negative rates.
That’s all folks
Mario Draghi’s press conference has concluded. But don’t worry, there will be no lack of FT content to read on the decision to launch a fresh round of stimulus measures and his call for eurozone governments to start offering more fiscal accommodation.
A good place to start would be Frankfurt bureau chief Martin Arnold’s story.
To sum up…
Although some of the measures announced are more modest than markets had expected, the overall effect is starting to look like a final Draghi bazooka.
The open-ended commitment to keeping rates low and QE in place until inflation is on target is a strong signal of the ECB’s resolve.
The new tiering system for banks’ deposits means there may now be scope – at least in theory – for the ECB to cut interest rates even further into negative territory if needed.
But as Silvia Dall-Angelo, economist at Hermes Management, points out:
While financial markets are loving the new round of accommodation, the impact on the real economy from the set of announced measures is uncertain.
As Mario Draghi repeatedly made clear, anyone who wants to see a swifter eurozone recovery now needs to look to fiscal policy.