What’s up, forex friends? The ECB is gonna have a little monetary policy huddle this week before releasing its official statement on Thursday (April 21, 12:45 pm GMT), followed by a press conference a few minutes later (April 21, 1:30 pm GMT). What happened in their previous statement and what can we expect from this event?
The previous ECB decision
- ECB cuts refinancing rate to 0.00% vs. maintaining at 0.05% as expected
- ECB cuts marginal lending rate to 0.25% vs. maintaining at 0.30% as expected
- ECB cuts deposit rate to -0.40% from -0.30% as expected
- ECB expands QE program from €60B to €80B
- ECB will launch a new series of four TLTROs starting in June 2016
During their March 10 monetary policy decision, ECB officials announced a stimulus package that was far more than what market players were hoping for by cutting rates across the board while expanding the QE program by €20 billion to €80 billion. In addition, the ECB planned to launch a new series of targeted longer-term refinancing operations (TLTRO), which are essentially just loans with very low interest rates that the ECB provides to euro zone banks.
The market welcomed the stimulus package with open arms and reacted with a burst of risk-taking and mass dumping of the euro, as traders priced-in the stimulus package while also abandoning the lower-yielding euro for higher-yielding assets like European equities. However, risk sentiment made a complete turnaround and the euro demand surged when the ECB press conference rolled around and ECB President Mario Draghi began speaking.
What exactly did he say that caused risk sentiment to sour and demand for the euro to spike? Well, the following are the statements that most market analysts are pointing to:
“How low can we go? Let me say that rates will stay low, very low, for a long period of time, and well past the horizon of our purchases. From today’s perspective, and taking into account the support of our measures to growth and inflation, we don’t anticipate that it will be necessary to reduce rates further. Of course, new facts can change the situation and the outlook.”
If you didn’t get all that, Draghi was simply saying that further rate cuts may no longer be needed for a while given the economic conditions at the time.
What can we expect this time?
The general consensus among economists is that the ECB will maintain its current monetary policy during the April 21 policy decision, with most economists surveyed by Bloomberg predicting that the ECB will most likely make a move during the September 8 meeting but not in the April meeting. With that, most forex traders would likely be focusing on the ECB’s overall tone and/or forward guidance on monetary policy (if any) for now.
As we’ve learned from the previous policy decision’s press conference, the ECB isn’t looking to cut rates again any time soon. However, the minutes of the March ECB meeting revealed that a “sharper rate cut could be considered” for the deposit rate, but the 10 bps cut was agreed upon because “further cut in the deposit facility rate could unduly increase the pressure on banks’ profitability, which could have adverse effects on the stability of the banking sector.” Still, the ECB “would also not rule out the possibility and prospect of further cuts if warranted by the outlook for price stability.”
In short, further rate cuts are still in the cards since the ECB can still cut further if needed, but ECB officials are not too enthusiastic to play that card yet.
Moving on, recent rhetoric from ECB officials have also heavily implied or outright stated that the ECB can still do more. One such vocal (and prolific) official is ECB Chief Economist Peter Praet, who said back in April 7 that “If further adverse shocks were to materialize, our measures could be recalibrated once more, commensurate with the strength of the headwind, also taking into account possible side-effects.” ECB Vice-President Vitor Constâncio also said on the same day that the ECB is ready to do “whatever is needed.”
Moreover, the results of the April 2016 euro area bank lending survey were released on Tuesday, and commentary from the survey noted that “euro area banks reported an overall improvement in their financial situation over the past six months … with the exception of the impact on bank profitability.”
However, an even closer look at the details showed that the improvements haven’t produced much results since 89% of banks said that the the ECB’s negative rate policy had no impact on the amount lent over the last six months while only 7% saw a “somewhat” of an increase. Heck, around 4% even said that it actually had a negative impact!
With regard to the ECB’s asset purchase program, a vast majority of banks also reported that they didn’t feel any impact at all, as you can see on the graphic from the Wall Street Journal below.
Given all the above, it’s very likely that the ECB will hold off on easing further during the upcoming meeting, but there’s a better-than-average chance that ECB Overlord Draghi will have a dovish stance during the press conference.
There’s also a chance that Draghi will talk about further easing down the road, including the possibility of even more rate cuts. However, the latter scenario could be less likely since the profitability of euro area banks are already hurting as it is.
Still, watch out if there’s talk about further rate cuts or openness to further rate cuts since that would be a blatant reversal of Draghi’s former statement about not cutting further and there’s a good chance that forex traders may react by dumping the euro.