Extra mild ECB tapering of QE and zero interest rates keep euro low

European Central Bank President Mario Draghi (on the right) and Vice-President Vítor Constâncio prepare to take positions for the customary Press Conference after the meeting of the Governing Council. (Taken on October 26, 2017. ECB photo; some rights reserved ).

Last Thursday, Mario Draghi, the President of the European Central Bank performed again his superb balancing act, between the needs of the South and the demands of the North. He led the Governing Council of ECB, Eurozone’s most powerful body, to map the exit road from the extraordinary monetary measures (Quantitative Easing) state as frictionlessly as possible. He halved the monthly money printing as Germany demanded, but extended the program by nine months. He also kept the basic interest rate at its present zero level as the South needs, “for an extended period of time, and well past the horizon of our net asset purchases”, as he clearly stated. Let’s dig into the details.

As from January 2018, the ECB will be printing and injecting €30 billion a month into Eurozone’s financial system instead of €60bn currently. However, Draghi affirmed the money printing will be extended by nine months until September 2018. He rushed to add also that it may be prolonged even further, “if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim”. To be reminded, ECB’s inflation target is set at close but below 2%, while it currently oscillates around 1.3% well below the target.

Jammed inflation

Persistently low inflation is haunting the Eurozone for years, despite the fact that the economy is growing for 17 quarters in row and unemployment has fallen close to pre-crisis levels. Yet, despite all that, and the €2 trillion the ECB has printed and injected into the economy, the rate of change of the consumer price index remains stuck at very low levels for a very long time.

By the same token, inflation forecasts for the medium term still see it below optimum levels. There are many reasons for this, but according to many analysts the most important among them is that the wage negotiations and agreements between unions and employers are based on past very low inflation figures.

Between North and South

Coming back to what Draghi announced last Thursday, it must be stressed that he efficiently tiptoed between the needs of the south and the demands of the North. Italy, Spain, Greece, Portugal plus France and Ireland need very low interest rates and a rather undervalued euro. On the contrary, Germany mainly vies for a substantial interest rate being paid on deposits, because this country is the definition of the ‘moneybag’. Her hoarded reserves exceed 1.5 trillion. Only last year Germany had a net trade surplus of around €300bn.

The South needs low interest rate and a cheap euro in order to refinance its mounting debts and support growth of the real economy. During the past months just the expectation about the ECB was planning to cut down the monthly money printing, had strengthened the euro versus the dollar. Eurozone’s single currency was trading at 1.05 dollars last spring and reached this autumn 120 American cents, penalizing the South.

Arresting euro’s hike

Nevertheless, the ECB knew it had to cut down, by the end of the year, its overblown quantitative easing program, and the strengthening of the euro was an inevitable side effect. In view of that, Draghi wanted to do it gradually. It was his strategy to let the money market gradually discount the upcoming policy changes all along this summer. His hints were so clear up to the point the actual announcement of the policy changes last week had the opposite effect. The exchange rate between the two monies fell from 1.19 on Wednesday to around 1.16 on Friday.

Draghi proposed another equally important measure which Governing Council accepted. That was the full reinvestment of the cash from maturing bonds the ECB has cropped and continuous hoarding. He said “the Eurosystem will reinvest the principal payments from maturing securities purchased under the Asset Purchase Program for an extended period of time after the end of its net asset purchases, and in any case for as long as necessary”.

No end to QE?

It must be clarified here that all along the quantitative easing period of the past two years, the ECB has accumulated a net worth of assets of more than €2 trillion under the APP. The bank will continue buying new assets of €60 billion a month until December and then €30 billion monthly from January to September 2018. As a result, at the end of September next year the ECB will be holding anything around €2.5 trillion in government and corporate bonds.

Of course, all along the past two years the ECB apart from the €60bn a month was also acquiring new bonds of a value more or less equal to assets which matured and were cashed. It was not clear though if the ECB was to reinvest the full amount of maturing assets, after the APP is terminated.

Draghi made a lot of efforts last week to clarify that whatever bonds mature of this unbelievable pile of €2.5tn in assets, the ECB will use the cash received to buy other bonds of an equal value and thus reintroduce the cash into the economy. This practice will continue “for an extended period of time after the end of its net asset purchases” and he said Eurozone needs it to keep on growing. In short, the ECB made clear, it will not cut down the amount of euros injected in the financial system, and the economy will continue being favored by a net wealth of extra cash of €2.5tn in the foreseeable future.

Keeping Eurozone liquid

Vítor Constâncio, Vice-President of the ECB said the monthly amount of reinvestments may vary around €10bn a month. Investors will be informed about the exact figure two or three months in advance. This clarification had a strong impact on the money markets. It became clear Eurozone’s liquidity will be maintained at even higher levels than today in the foreseeable future. That’s why the foreign value of the euro decreased at the end of last week and the parity with the dollar fell. It would have been the opposite, if Draghi hadn’t taken those additional measures, when announcing the tapering of the quantitative easing.

Last but not least, Draghi revealed there was a consensus in the Governing Council about all those monetary policy changes. The only case where there was ‘just’ a large majority was if “an end date should have been announced or not” about the whole program. Not much thinking is needed to understand it was Germany asking for an end day to be set. And Draghi concluded “…the large majority of the Governing Council members preferred to keep it open-ended”.

 

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

the European Sting Milestones

Featured Stings

These campaigners want to give a quarter of the UK back to nature

How to build a more resilient and inclusive global system

Stopping antimicrobial resistance would cost just USD 2 per person a year

UN General Assembly President defends ‘landmark’ migration compact

No end to Deutsche Bank’s problems: new litigations in the US and frailty in EU stress test

A day in the life of a Rohingya refugee

Better protection against non-cash payment fraud

Preparing for developing countries the ‘Greek cure’

DR Congo Ebola centre attacks could force retreat against the deadly disease, warns UN health chief

Global Talent – Professional Internships

In dreams and in love there are no impossibilities

Junior Enterprises as a solution for Youth Entrepreneurship

Canada has high levels of well-being and solid growth but trade tensions and housing market pose risks while inclusiveness could be improved

Libya: Thousands seek shelter in health clinics from Tripoli fighting, UN warns

Security: better access to data for border control and migration management

MEPs propose more transparent legislative drafting and use of allowances

The relationship between Dengue and the rainfall in Boa Vista, Brazil

Tackle ‘tsunami of hatred’ across the world urges Guterres, to counter anti-Semitism, racism and intolerance

The strong version of the EU banking union gains momentum

‘Shared responsibility’ to stop 420,000 needless deaths from tainted food each year, UN, world leaders warn

Here are 3 lessons Europe can learn from China’s flourishing start-ups

UK: Customs Union with EU or a longer delay of Brexit

Europe’s top court hears Intel and sends € 1.06 bn antitrust fine to review

Scientists have a new suggestion to create more climate-friendly cows

It’s time for global businesses to accept local responsibility

This is how Copenhagen plans to go carbon-neutral by 2025

Canada grants asylum for Saudi teen who fled family: UNHCR

Migration has set EU’s political clock ticking; the stagnating economy cannot help it and Turkey doesn’t cooperate

Joint advocacy letter template to sign and ratify the Treaty on the Prohibition of Nuclear Weapons

With millions of girls ‘at risk’ today of genital mutilation, UN chief calls for zero tolerance

5 surprising ways to reuse coffee grounds

Mergers: Commission fines Canon €28 million for partially implementing its acquisition of Toshiba Medical Systems Corporation before notification and merger control approval

Why saving our forests should be a global priority

Fears for food security and the future of farming families, as Fall Armyworm spreads to Asia

Climate change is destroying a barrier that protects the US from hurricanes

Humanitarian visas would reduce refugees’ death toll

Snowden is the “EU nomination” for this year’s Oscars

4 key ways countries can finance their SDG ambitions

South Sudan: ‘Outraged’ UN experts say ongoing widespread human rights violations may amount to war crimes

The racial wealth gap in the US is affecting its citizens and its economy – this is how

MWC 2016 LIVE: Under Armour learns from “robust community of data”

Restore land to save the planet, boost the economy, says head of UN body combating desertification

Trump and Brexit: After the social whys the political whereto

Food system failures in our age of abundance

UK must make clear what it wants, MEPs say in Brexit debate

‘Stay together and step up’ action to meet Global Goals, ECOSOC President tells development forum

Campaign kicks off with High-level Event on #FairInternships

Generalist practicing: is it worth it?

How to make primary healthcare a favourable career choice for medical students: Strategies and reflections

Worldwide UN family celebrates enduring universal values of human rights

Tuesday’s Daily Brief: sexual violence in conflict, a malaria vaccine trial, updates on Libya, Ebola in DR Congo, Sri Lanka and Mali

Finland must focus on integrating migrant women and their children to boost their contribution to the economy and society

Why did Cameron gain absolute majority? What will he do now? Will he vote ‘yes’ in Britain’s in – out EU referendum?

ITU Telecom World 2017: exploring smart digital transformation

How Finland is fighting fake news – in the classroom

Peace dividend palpable in South Sudan, but ‘grassroots’ are moving faster than elites, says Shearer

E-Governance: A powerful tool to combat, mitigate and sustainably manage disaster risks

“One Belt One Road”: Its relevance to the European Companies

Khashoggi trial in Saudi Arabia falls short of independent, international probe needed: UN rights chief

The future of crypto-assets, from opportunities to policy implications

ECB’s unconventional monetary measures give first tangible results

Inspiring young doctors: the beginning of the change

Davos: Why the global elites couldn’t find answers this year?

More Stings?

Speak your Mind Here

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s