In his recent speeches, Draghi has been teasing the markets with hints of further easing. This is a bit surprising, considering the euro zone has recently shown notable improvements in consumer confidence and overall economic activity.
On the one hand, the central bank is probably just trying to maximize their current easing programs by keeping a lid on longer-term rates. On the other hand, the ECB might really be laying it all on the line to ensure that the region stays on track to recovery.
So is Draghi just jawboning or is the ECB really ready to act? Here are some signs that point to further easing:
1. Draghi hints at more LTRO.
In his testimony this week, Draghi dropped another bombshell on the markets by saying that the central bank is looking to implement another set of long-term refinancing operations (LTRO) to shore up euro zone’s banking sector.
According to the ECB head honcho, money market rates in the euro zone have climbed to “unwarranted” levels while lending conditions have not kept up. By deploying another LTRO, Draghi hopes to boost liquidity and prevent borrowing costs from rising.
2. Excess liquidity is falling.
Excess liquidity is just a fancy term for extra moolah stored in banks’ vaults. This acts as a buffer in case the financial system crashes and burns yet again, ensuring that banks have emergency cash to lend in order to keep the economy functioning in the event of a crisis.
In the euro zone, excess liquidity has fallen to the ECB’s lower limit of 200 billion EUR. Draghi has mentioned that further declines in excess liquidity increase the upward pressure on lending rates, as banks might end up shouldering more risk if their cash reserves are depleted.
3. Cutting rates is on the table.
In the ECB’s latest monetary policy decision, Draghi reiterated that the central bank’s rates would “remain low OR LOWER for an extended period.” In fact, he has revealed in a press conference that members have already discussed the prospect of a rate cut.
Remember that the ECB is keeping a close eye on the money market rates’ impact on the region’s inflation outlook. Not only that, but some ECB members are on Draghi’s camp, believing that growth in the euro zone is very much in its early stages and needs to be watched closely.
Right now, word on the pip streets is that the ECB’s next policy moves will highly depend on economic data and fiscal stability. I wouldn’t be surprised if the ECB cuts its rates after a couple of disappointing growth figures or if it starts intervening the moment that the euro rises dramatically against its counterparts.