Now they worry about the limits of central bank policy, but that’s not what’s worth worrying about anymore.
Advertisement
Last Thursday the European Central Bank (ECB) announced a further reduction in interest rates, extended its quantitative easing programme by increasing the rate at which it buys assets, beefed up its targeted long-term refinancing operations (TLTRO) programme and extended its horizon. The steps mark a dramatic expansion of the central bank’s stimulus program, using tools that have never been deployed on such a scale in Europe. At their meeting last week, the ECB attempted to surprise the market with a major new initiative to revive the struggling European economies.
Nevertheless, the SNB pledged to “remain active in the foreign exchange market, in order to influence exchange rate developments where necessary”. As a principle, there’s nothing that says odd or undesirable things automatically occur when interest rates goes south of zero. This encourages banks to lend rather than holding money in the central bank. However, in the subsequent press conference, Mr Draghi’s indication that there would be no further rate cuts caused an immediate reversal with the Pound plummeting by 3 cents against the single currency in a matter of minutes.
However, while inflationary pressures are still absent, is there a chance that the euro zone is showing some signs of life?
“I made clear that… monetary policy has been really the only policy driving the recovery in the last few years, it can not address some basic structural weaknesses of the (19-nation) eurozone economy”, Draghi told reporters.
The EUR/USD depreciated slightly on Tuesday. Yet FX markets weren’t fully tilted in the “risk-on” direction: EUR/CAD settled higher by +0.55%; EUR/NZD was the best performing EUR-cross, up by +2.25%. Sterling GBP= also fell against the dollar, shedding 0.4 percent to $1.4332. Brexit fears have taken a toll on the British pound. That means investors have had to rely on primary markets-buying directly from the issuer-if they want to get hold of corporate debt. And last, the USA credit component. Employment continues to be the strongest pillar but deep cracks are showing through on retail sales as consumers are saving more and spending less. With heightened concerns over the weakness in the global economy, rate hike expectations have been pushed back until at least the summer.
Fed Governor Jerome Powell defended the inclusion of dates in the plot, given that the Fed expects rates to “only gradually” return to pre-crisis levels.
The market has seen the European Central Bank do their part and is now looking to Washington to follow through on solidifying a monetary policy divergence. “We think the Fed should hike in June and not again until after the USA election in December”. But it is easy to invest in gold, and it doesn’t have to be in physical gold. And the Chinese authorities have eased monetary policy (via a cut in the reserve ratio for banks) to boost growth.
Perhaps the reason for the interest has to do with increased oil prices.
The Federal Open Market Committee (FOMC) will release its statement on Wednesday, March 16 at 2:00 pm EDT.
Advertisement
After more than a year of relatively short intervals between stimulus packages, continuous action has come to be seen as the norm at the ECB, placing the burden on the bank to avoid disappointment. The Bank of Japan adopted negative rates in January. One method would have been to make a bigger cut in the deposit rate and a smaller increase in the size of asset purchases.
