The European Central Bank (ECB) made its announcement from yesterday's policy meeting this morning at 7:45 am, and the tone was certainly dovish. ECB President Mario Draghi repeatedly highlighted the merits of the central bank's quantitative easing program that kicked off at the beginning of the year—even though, to date, the measure has produced virtually nothing in the way of real results.
Although far from unexpected, the dovish rhetoric and outlook helped place strong downward pressure on the euro, which plunged from recent highs to below $1.12 this morning, settling around $1.1165, its lowest since late September. In response, the dollar spiked more than 1% to 96.0 on the DXY index.
Draghi Treads Carefully
The ECB president, best known for his assertive declaration last year that he would do "whatever it takes" to keep the Eurozone economy intact, was measured in his comments about the central bank's plans going forward. It did not come as a surprise that the 25-member ECB Governing Council decided to hold rates (0.05%, an all-time low) right where they are: Over 50 analysts from Bloomberg unanimously predicted such an outcome. So, the biggest take-away from the meeting in Malta—a biannual gathering for the ECB outside of its Frankfurt, Germany headquarters—was the tenor of where policy is going from here.
Draghi straddled the line carefully, promising to continue QE until there's some significant development regarding inflation. He cited "downside risks to the outlook for growth and inflation" as major concerns.
He would not, however, go into detail about whether or not the bank was considering stepping up its efforts, given the lack of results thus far. (Japan has faced the same problem of little to show for its massive stimulus program.) There were signals to that effect, though: Draghi hinted that expanding QE measures would certainly be the main concern at the ECB's next policy meeting on December 3rd.
Mr. Draghi will be holding a press conference later this afternoon at 2:30 pm EST.
It's beginning to look more and more like the developed economies who are easing monetary policy (notably the EU and Japan) rather than planning to tighten it (like the U.S. and U.K.) are in a bind where there are no tools left at central bankers' disposal if their stimulus doesn't work. Are central banks simply running out of instruments to handle deflation?
Here are the other options the ECB has in lieu of cutting interest rates that are already effectively zero:
- They could extend the duration of QE beyond September 2016;
- They could increase the size of monthly asset purchases, which are currently €60 billion ($67 billion) per month;
- They could expand what types of assets (bonds) the bank is purchasing.
Draghi ruled out another option, cutting the bank's benchmark deposit rate, because this tool has already reached its lower bound. ECB deposit rates are already in negative territory, at -0.2%. Moreover, implied in the third option above is that bond purchases can be adjusted for size, maturity duration, and composition.
80% of Bloomberg analysts predicted that the ECB will at some point adjust its asset purchases by one of the means described earlier—i.e. expand its QE. The breakdown of their predictions for when such extra stimulus will come was 2% thought action would be taken today, 56% saw the ECB moving before year's end, and 86% believe QE will be boosted by next March.
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