And the ECB decides to sit on its hands AGAIN! Despite the growing need for monetary policy easing, ECB Governor Draghi and his men refrained from taking action in the latest ECB decision. What the heck are they waiting for?!
On the economic front, there are plenty of reasons why the euro zone badly needs additional monetary stimulus. Draghi acknowledged these challenges in his testimony, as he noted that inflationary pressures remain weak. “There is consensus about being dissatisfied with the projected path of inflation,” he said. However, he also pointed out that policymakers are still waiting for the next batch of CPI forecasts before deciding whether further easing is necessary or not.
Aside from that, Draghi also mentioned that the rising euro is not doing any good for the economy. In fact, he emphasized that euro strength is a serious concern and that ECB officials will hold another round of discussions to figure out the best way to address this issue.
The main takeaway from the latest ECB rate decision is Draghi’s hint that the central bank MIGHT be ready to ease soon. In the press conference that followed the ECB announcement, Draghi remarked that the ECB governing council is “comfortable with acting next time,” possibly referring to the next month’s ECB monetary policy statement schedule. However, he stopped short of specifying exactly what kind of policy action they could take. Talk about being a buzz kill!
Bear in mind that the ECB has used up practically every single monetary policy tool in its arsenal, from rate cuts to unconventional LTRO efforts. There have been several calls for negative deposit rates, which should give commercial banks more incentive to ramp up their lending activity, but the central bank seems hesitant to implement this.
Whichever easing measure the ECB chooses to implement, it could be enough to hit two or three birds with one stone. As discussed in the School of Pipsology section on Fundamental Analysis, lower interest rates or increased money supply tends to drive the currency’s value lower. In turn, a depreciating local currency could push price levels higher, which could eventually eliminate the threat of deflation in the region. This could translate to a pickup in spending and investment, which would keep overall economic growth supported.
What you should remember though is that all this hinges on the inflation forecasts to be published early next month, so y’all better mark your calendars for that particular event. Downbeat CPI forecasts could lead to a sharp selloff among euro pairs, as this would more or less confirm that the ECB would implement some form of easing in the same month. Do you think this is a likely scenario?