Yesterday the European Central Bank (ECB) published its first monetary policy announcement since the EU referendum in late June. If you recall, all eyes were on head honcho Mario Draghi and his gang to see if they would implement changes in light of the Brexit vote.
Unfortunately for the volatility junkies, the Brexit issue was in the backseat of the ECB’s policy announcements. So what exactly did the central bank have to say? Let’s boil them down into four points:
1. No policy changes this month
That’s right; it was Throwback Thursday for the ECB yesterday! As widely expected, the central bank kept its major policies unchanged for the month of July.
The key refinancing rate remains at 0.0%, the deposit rate is still at -0.4%, and the monthly asset purchases is unchanged at 80 billion EUR. It doesn’t look like the tides will change either, since the ECB warned that interest rates will “remain at present or lower levels for an extended period of time” and that the asset purchasing program will run “at least until March 2017 or beyond” until inflation is back on track to hitting the central bank’s goals.
Lastly, the ECB repeated its commitment, stressing its “readiness, willingness, and ability” to use all instruments available. Interestingly enough, Draghi also noted that they haven’t quite talked about which specific instruments they’ll be using just yet.
2. Brexit schmexit
Much like the RBA and the BOE, the ECB was all “Take a chill pill, bro. Me thinks it ain’t that bad.” Okay, maybe that wasn’t how they said it. But the ECB did say that it’s too early to estimate the full impact of the referendum, and that the central bank is still waiting for forecasts “in the coming months” before it could fully assess the situation. All aboard the wait-and-see bandwagon!
In the meantime though, Draghi was in full proud papa mode on the euro zone’s financial markets, saying that it has “weathered the spike in volatility with encouraging resilience.” He also pointed out that no disruptions were seen in the banking sector or elsewhere, thanks to the ECB’s efforts to ensure that liquidity was available. Talk about a pat on the back!
3. Mixed growth and inflation forecasts
Draghi was careful to mix the good and the bad news when relaying the ECB’s growth and inflation estimates. He and his gang are still expecting modest growth, but are still looking out for the downside risks (Brexit, uber-slow inflation, and Italy’s bank crisis). He did mention that Q2 growth will likely be weaker than Q1 though, mostly due to tepid export growth.
The ECB was a little more upbeat about inflation forecasts, saying that the EU referendum barely made a dent on it. He cited a survey of forecasters showing inflation rate will likely hit 0.3% this year, 1.2% uptick in 2017, 1.5% in 2018, and 1.8% in the medium-to-long-term trends.
4. All eyes on Italy’s bank crisis
Perhaps the most noteworthy sound bites from Draghi’s press conference yesterday were his remarks about Italy’s bank crisis. If you recall, the home of the best pizzas and gladiators is currently dealing with a banking sector that’s neck-deep in bad or non-performing loans (NPL) worth at least 200 billion EUR (8% of the total loans). Many believe that the bad loans could blow up the country’s financial system and even spark another banking crisis throughout the region. Duhn duhn duhn.
Though the ECB top boss didn’t EXACTLY mention Italy, he did say that bank equity prices are “of some significance” to the ECB because a big drop in bank share prices would cause the banks’ capital buffer and lending profits to fall, thereby affecting the execution of the central bank’s stimulus measures.
What got market players’ attention was Draghi’s suggestions of using the public’s money to help the troubled banks. More specifically, he believes that using “public backstop” is possible during exceptional times, but also agreed that he would need to get thumbs up from the European Commission first.
He also threw in the idea of constant regulatory supervision as well as government action through legislation. In the end, Draghi recognizes that solving the NPL problem takes time even as the issue requires speedy action from the policymakers.
Overall it looks like the Brexit issue hasn’t affected the ECB’s plans as market geeks initially thought it would. Until the ECB receives more post-Brexit data, the central bank will likely focus on its domestic issues, which, let’s face it, are already enough to keep Draghi and his team busy through eternity.
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