Dovish Draghi is at it again! The ECB Governor gave another downbeat monetary policy statement, as he dropped a few hints on further stimulus. Here are four signs that the ECB might ramp up its easing efforts.
1. Preparations for ABS purchases
Nope, Draghi ain’t lookin’ to hit the gym to work on his six-pack abs. He’s talking about the ECB’s plans to conduct purchases of asset-backed securities (ABS) later on!
This idea was briefly mentioned during the June ECB rate statement, but market watchers were way too focused on the central bank’s rate hike spree back then. This time, euro traders paid closer attention to Draghi’s remarks on creating a simple and transparent program to ensure that outright ABS purchases would stimulate lending and spending in the economy. After all, this confirms that the ECB is setting the stage for another round of stimulus which would be doled out when necessary.
2. Russian sanctions could weigh on euro zone growth
Perhaps one of the biggest concerns of the ECB these days is the recent set of sanctions implemented by Russia on the European Union’s food imports. Since Russia is the fifth largest food importer in the world, the EU stands to lose a lot in terms of trade revenue and production due to this ban.
It’s already bad enough that Italy, the euro zone’s third largest economy, has slipped back into recession after it posted a 0.2% contraction for Q2 2014. Growth in the rest of the region has been feeble at best, with Germany and France leading the pack yet still facing a few challenges of their own. Additional threats to the economy could further undermine its performance later on, possibly prompting the ECB to take measures to keep growth supported.
3. Draghi said that Fed and ECB rates will diverge
During the ECB press conference, Draghi mentioned that ECB and Fed rates will diverge for a long period of time. Bear in mind that, even as the FOMC tries not to appear too excited about the U.S. economic recovery, it’s no secret that the Fed is moving closer to hiking interest rates sooner or later. The ECB, on the other hand, probably won’t be looking to tighten in the foreseeable future.
4. Downbeat economic assessment
Overall, the ECB doesn’t seem to be too happy about the region’s economic progress, as policymakers expect the recovery to be moderate and uneven. Inflationary pressures remain weak, with the CPI chalking up a mere 0.4% annualized pace of increase in July. Industrial output and factory orders have slumped in Germany, the region’s largest economy.
The euro seemed unfazed by all this though, as most market participants already anticipated downbeat remarks from the ECB. Do you think the recent ECB statement could keep the euro in a longer-term downtrend?