In case you’re living under a rock, you should know that the euro took serious hits yesterday despite the lack of policy changes from the ECB. What’s up with that?! Here are four things you need to know:
No policy changes in October
As expected, the European Central Bank (ECB) didn’t make any changes to its monetary policies:
- The rate on the main refinancing operations is kept at 0.00%
- Interest rates on marginal lending facility is still 0.25%
- Deposit facility rate remains at -0.40% and
- Monthly asset purchases is kept at €80 billion and is expected to run until the end of March 2017 or beyond if necessary.
More easing vs. tapering
As we discussed earlier this month, major central banks like the BOJ and ECB are running out of runway to boost consumer prices. In a nutshell, they need to taper their asset purchases so they don’t create asset bubbles or run out of government bonds to buy, but they have to do it so that market players understand that tapering does not mean tightening.
Remember that the ECB’s balance sheet has already ballooned to a record high of €3.5 trillion after repeatedly extending its stimulus programs. Despite that, the euro zone’s inflation continues to stay well below the ECB’s target of just under 2.0%. And with the ECB’s QE program ending in five months, market players expected hints on whether or not the central bank will extend its asset purchases or begin to taper their purchases.
Instead of outlining plans though, Draghi shared that he and his team have only discussed possible changes to QE but wouldn’t share which options were favored.
Apparently, they have NOT discussed extending the QE program beyond March, lowering interest rates, or tapering their purchases anytime soon. Draghi even discounted earlier rumors of possible tapering, saying that the source was “unauthorized and uninformed.”
All will be revealed in December
Looks like December’s meeting will be a live one! ECB members might not have discussed much this month, but they might have a more serious huddle in December. Draghi announced that:
“In December the Governing Council’s assessment will benefit from the new staff macroeconomic projections extending through 2019 and from the work of the Eurosystem committees on the options to ensure the smooth implementation of our purchase programme until March 2017 or beyond if necessary.”
EUR traders don’t like ambiguous statements
Draghi’s pussyfooting around the ECB’s plans didn’t do the euro any favors. The combo of more easing down the road, lack of hints on tapering, and the uncertainty of their plans ahead of the March 2017 deadline only made euro traders more nervous.
The euro’s price action was quiet even after the ECB’s official statement was released, then shot up when Draghi said that stimulus measures “won’t last forever.” However, it soon fell across the board as soon as Draghi seemed to favor more easing anyway.
EUR/USD rocketed to 1.1040 before closing 42 pips (-0.38%) lower than its open price while EUR/JPY closed 95 pips lower than its intraday high. Meanwhile, EUR/GBP closed at .8921 after hitting a high of .9026.
Right now we know two things from what Draghi has shared. First, the ECB is nowhere done stimulating the economy. Though he hinted that the economy is slowly but steadily recovering, he also warned that there no signs yet that inflation is picking up at a sustainable rate. Not only that, but the ECB also doesn’t see any bubbles yet, and that they don’t think the QE program will run out of bonds to buy anytime soon.
Next, we know that if the ECB does taper, it won’t do so in an abrupt manner. Though Draghi hinted that QE can’t run forever, he also shared that “an abrupt ending to bond purchases, I think, is unlikely;” adding that a sudden stop “is not present in anybody’s mind.”
What do you think? Will the ECB add more stimulus or start to taper in December?