Draghi to hold on zero interest rates until he leaves ECB

ECB Press Conference in Riga, Latvia on 14 June 2018. The new ECB Vice-President Luis de Guindos (on the left), participated for the first time in the customary Press conference after the meeting of the Governing Council. Deputy Governor of the Latvia central bank Zoja Razmusa, in the middle. ECB President Mario Draghi on the right. ECB photo, some rights reserved.

The announcement of the end of the monthly money injections into Eurozone by Mario Draghi, the President of the European Central Bank was not received in the capital markets as a hawkish toughening of monetary policy, as it theoretically should have been. The reasons are many. On the contrary, the euro lost more ground with the dollar – helping exports and impending imports – and euro area shares had a party on Friday, after last Thursday’s Press conference of ECB’s leadership in Riga, Latvia.

This was the result of what Draghi meant as ‘forward guidance’ for investors and markets. He clarified the €2.5 trillion already spinning around will stay there and also that “the interest rate on the main refinancing operations” is to remain at flat zero at least through the summer of 2019. This was enough for markets to celebrate and the euro to soften a bit.

No more money printing

In detail, he signalled that after December 2018 there won’t be any more money printing and spinning, but the ECB will continue “to make net purchases under the asset purchase program (APP) at the current monthly pace of €30 billion until the end of September 2018…. after September 2018, subject to incoming data confirming the Governing Council’s medium-term inflation outlook, the monthly pace of the net asset purchases will be reduced to €15 billion until the end of December 2018 and that net purchases will then end”.

Mind the condition for that: “subject to incoming data confirming the Governing Council’s medium-term inflation outlook”. It means the ECB can keep its money printing machines running even beyond December if inflation wanes further.

In any case, this is the long expected end of money printing and spinning program of the central bank. It goes without saying that the net asset purchases are realized by the ECB with newly printed money, inflating its balance sheet by an equal amount. It’s more than five years now the ECB introduced this extraordinary monetary program of asset purchases.

It has being injecting tens of billions of euro cash every month  into the economy, in order to revive the fading inflation rate and support the real economy grow on zero interest rates. Money printing and zero interest rates have been Draghi’s medicines also for the over-indebted economies of euro area, intending to make ECB’s accommodative policies felt all over Eurozone and not only in the affluent North. So, the heavy debtors in the South can refinance their obligations at low interest rate cost. At the same time though, Germany is on many occasions favored with negative refinancing costs.

Favoring a less pricey euro

By the same token, this accommodative policy, which is about to end – at least theoretically – arrests the long term tendency of the rising euro-dollar parity. It thus helps exports and slows down imports. Still, Berlin has been critical of Draghi’s extraordinary monetary policy from the very beginning in early 2013. Germany especially fought the zero interest rate policy as being the largest ‘moneybag’ of Europe.

Draghi now makes sure that the money which has been printed and distributed so far is to remain there. He said,” the Governing Council intends to maintain its policy of reinvesting the principal payments from maturing securities purchased under the APP” and this “for an extended period of time after the end of the net asset purchases”.

As noted above, this means the €2.5 trillion will stay out there for an indefinite period of time. Add to that the decision for the main ECB’s interest rate – for bank refinancing operations – to remain stuck at a round zero and you come up with a quasi real indefinite continuation of his extraordinarily accommodative monetary policy.

Inflation must revive

It must be stressed that according to Draghi, all decisions signalling the end of new money printing are “subject to incoming data confirming the Governing Council’s medium-term inflation outlook”. That is, if inflation prospects appear weaker, the ECB can reconsider the ending of money printing and starting it again. The target for inflation is close but below 2%.

Dollar interest rates increase

At the same time though, the US central bank, the famous Federal Reserve, follows exactly the opposite policy guidelines. It keeps increasing its main interest rate to arrest possible inflation flare-up. Last Wednesday, 13 June, the Fed increased its main interest rate by a quarter of a percentage unit, for a second time this year. This brings the Fed’s rate range to 1.75% to 2%.

There is more to it though. In comparison to ECB’s decision to keep her own interest rate at zero through the summer of 2019, the Fed left it to be understood there may be two more increases of a quarter of a unit each before the end of this year. As a result, the euro has lost 5.7% with the dollar during the last three months and around 1.5% in one week. This may be considered also an ECB indirect response to the American trade aggression against Europe. Helping euro to devalue is a strong point in a trade feud.

The truth is then that the much anticipated end of ECB’s extraordinary monetary policy is not going to be a fully fledged one. Rather the opposite is true. Obviously, Draghi wishes to continue supporting the South to refinance its debts at low interest costs, at least as long as he is at the helm of ECB until October 2019. His non renewable eight year term ends on 31/10/2019.

 

Advertising

Advertising

Advertising

Advertising

Advertising

the European Sting Milestones

Featured Stings

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

European banking stress tests 2014: A more adverse approach for a shorter banking sector

The Japanese idea of ‘chowa’ – and how Asia can thrive in the future

We need to talk about how we define responsibility online – and how we enforce it

Big impact vs big exit: the social side of the start-up game presented at the WSA Global Congress in Vienna

What you need to know about the Sustainable Development Impact Summit

EU and China to do more in common if the global scene gets worse

Why Eurozone’s problems may end in a few months

Modern society has reached its limits. Society 5.0 will liberate us

Artificial Intelligence has a gender problem. Here’s what to do about it

The Commission tries to stop the ‘party’ with the structural funds

EU-Western Balkans summit in Sofia

This new way of understanding disease is changing medicine

7 amazing ways artificial intelligence is used in healthcare

“The Sea is vast as it admits all rivers”, Ambassador Yang Yanyi of the Chinese Mission to EU gives her farewell address in Brussels

Online radio and news broadcasts: Parliament and Council reach deal

Fragile countries risk being ‘stuck in a cycle of conflict and climate disaster,’ Security Council told

US-China trade war: Washington now wants control of the renminbi-yuan

Climate change and health: public health awareness in an international framework

Climate Change : An Already Health Emergency

In Gaza, UN envoy urges Israel, Palestinian factions to step back from brink of a war that ‘everybody will lose’

Will Eurozone be able to repay its debts? Is a bubble forming there?

EU readies for eventual annulment of the Turkish agreement on immigrants-refugees

EU Top Jobs summit ended with no agreement: welcome to Europe’s quicksand!

2016 crisis update: the year of the Red Fire Monkey burns the world’s markets down

2030 development agenda: Major breakthrough for world of work

Youth unemployment: No light at the end of the tunnel

Somalia has ‘once in a generation’ gender equality opportunity – UN Women chief

A Valentine’s Special: we can never overdose on love

EU Leaders’ meeting in Sofia: Completing a trusted Digital Single Market for the benefit of all

Merkel, Mercedes and Volkswagen to abolish European democracy

EU Commission: Banking and energy conglomerates don’t threaten competition!

THE ROAD TO GANESHA

Italy can stand the US rating agencies’ meaningless degrading

Cyprus banks under scrutiny

Fed, ECB take positions to face the next global financial crisis; the Brits uncovered

These charts show where the world’s refugees came from in 2017 – and where they’re heading

EU to spend €6 billion on youth employment and training futile schemes

Eurozone: There is a remedy for regional convergence

To win combat against HIV worldwide, ‘knowledge is power’, says UNAIDS report

Energy Union: EU invests a further €800 million in priority energy infrastructure

Measuring consumer confidence isn’t useful anymore. Here’s what we should do instead

COP21 Breaking News_10 December: UN Climate Chief Calls for Final Push to Meet Adaptation Fund Goal Very Close to Target

While EU Open Days 2013 discuss the 2020 strategy, Microsoft shares a glimpse of EU 2060

How can we build a workforce for our digital future?

Environment Committee MEPs vote to upgrade EU civil protection capacity

A Sting Exclusive: “Junior Enterprises themselves carry out projects focusing on the environment”, JADE President Daniela Runchi highlights from Brussels

Economy on a steady rise in Latin America and Caribbean region ‘despite international turbulence’ – UN report

Dramatic funding shortages a ‘severe catastrophe’ for people of Gaza: UN Coordinator

Frontline workers vaccinated in Uganda over Ebola fears, as top UN officials visit outbreak epicentre in DR Congo

Millions more migrant workers, means countries lose ‘most productive part’ of workforce

Girls groomed for suicide missions fight back against the extremists of Lake Chad

India’s economy is an ‘elephant that is starting to run’, according to the IMF

The right approach to addressing overcapacity problem from a Chinese perspective

Berlin favours economic and social disintegration in certain Eurozone countries

EU Commission spends billions without achieving targets

“Prevention is better than cure”: the main goal of modern medicine

More than 90% of the world’s children are breathing toxic air

Infrastructure around the world is failing. Here’s how to make it more resilient

Commission launches new tool to support digital teaching and learning in schools

Big world banks to pay $ 4.95bn for cheating customers; Is it a punishment or a gentle caress?

More Stings?

Trackbacks

  1. […] on news from the ECB that while money printing is projected to end in December 2018, this is still contingent on the medium-term inflation outlook towards the ultimate target of “below but close to 2 […]

  2. […] on news from the ECB that while money printing is projected to end in December 2018, this is still contingent on the medium-term inflation outlook towards the ultimate target of “below but close to 2 […]

  3. […] on news from the ECB that while money printing is projected to end in December 2018, this is still contingent on the medium-term inflation outlook towards the ultimate target of “below but close to 2 […]

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