The “monetary James Bond ‘has struck again. Most economists had expected that the European Central Bank (ECB), despite all the turmoil beginning of the year to wait and see, after they had cut interest rates in December and extended the current bond-buying program.
But with Mario Draghi always “Never Say Never” applies the motto unkten experienced ECB watchers before the meeting of the Central Bank Council. And they were right: Central Bank president Mario Draghi surprised with a pretty clear signal that further easing rounds are likely imminent.
“We are at our next meeting in March to review our monetary policy and to adjust,” said the Italian. This sentence, which he repeated several times, was important, he stressed especially. Since the beginning of the downside risks to the economy had increased again. The circumstances have changed “fundamentally” since December, Draghi said, to connect with almost grimly: “The Governing Council is capable, determined and willing to act.”
The clear words surprise mainly because the ECB had reacted only in December to the weaker economic environment. At that time, the Council lowered the deposit rate for deposits, deposit the commercial banks at the central bank, to minus 0.3 percent. In addition, the trillion dollar bond-buying program was extended by six months, which means additional resources of about 400 billion euros.
These measures were appropriate in the light of that information, Draghi said. The fact that the ECB has already so short time reloading later, he did not look at as mortgage for their credibility – from Draghi’s view would the credibility rather then suffer when the central bank would not respond to changing circumstances.
fear of further deflation
As an important factor Draghi called the dramatic fall in oil prices. Since completion of the final economic and inflation forecasts for December, the most important raw material of around 40 percent has become cheaper. That leaves consumers all the more room for other consumer spending and boosted the economy already in the short term, also in Germany. However, the ECB fears so-called second-round effects.
How could the decline in energy costs, for example, dampen the wage demands of the trade unions, which inhibits the development of prices in the next step. For the next few months should be expected with very low or even negative inflation, Draghi said.
Therefore, we must now prevent a downward spiral, which is considered among economists as crippling to the economy. In a so-called deflationary spiral falling prices across the board, with consumers holding back in anticipation of declining costs with purchases, sinking wages and stalling investments.
How much is the pressure to act in fact, was last but also among the central bankers themselves controversial. A fraction of critics had turned in December against the monetary easing, also because they first wanted to wait and see how the bond program launched nearly a year ago would continue to act.
All the Draghi was more important now to emphasize that the 25-member Council had unanimously agreed on the new communication line – ie the promise that monetary policy check in March. Then the Central Bank shall present their latest forecasts on the development of inflation and growth.
ECB monetary policy in 2016 further relax
Commerzbank chief economist Joerg Kraemer expects “that the ECB 2016 monetary policy again loosened, because the core inflation rate, will not attract different than expected by the Fed, the ECB and also as regards the economy is overly optimistic. ”
Until then, the ECB experts, the technical Preparations for single monetary policy instruments meet. Whether you rather want to turn the interest rate screw or considering further purchases of securities, Draghi would not reveal even to multiple demands.
For investors hope came on another cheap money to good. The Dax rose immediately after the announcement of the ECB by over two per cent, the exchange rate of the euro weakened against the dollar after noticeably. “The question is whether Draghi in March can really deliver,” warns Carsten Brzeski, chief economist at ING-DiBa.
Financial markets expect more cheap money
Finally, already was the December decision something of a compromise between have hawks and doves in the Council. Even then had Draghi certain image wounds plug, because the financial markets had given his statements prior to the meeting expecting more cheap money.
This damper prevents the ECB President but obviously no intention to continue its many years preferred tactic: Again, he has set with clear public statements his council colleagues in a tight spot. Anything other than a renewed easing round in March would now be a bitter disappointment for investors.
After Draghi’s doctrine but that is probably an urgent need to carry out the inflation back to the ECB target of just under two percent. He is far away, as well as the Fed chairman acknowledged, but he was decided: “We never give up.”