What’s all the hul­la­baloo about ECB an­nounce­ments?

Financial Mirror (Cyprus) - - FRONT PAGE -

The pres­i­dent of the Euro­pean Cen­tral Bank (ECB) re­cently an­nounced the de­ci­sions of the Gov­ern­ing Coun­cil. Var­i­ous mon­e­tary pol­icy de­ci­sions have been taken, and will be im­ple­mented in the Euro­pean eco­nomic area. Th­ese in­clude a to­tal of 6 points, all of which are aimed at com­bat­ing de­fla­tion, main­tain­ing the value of the euro, ac­cel­er­at­ing the ve­loc­ity flow of money through Europe to in­crease wages, pro­duc­tion ca­pac­ity and the like. The 6 points in­clude the fol­low­ing:

- The ECB will in­crease its as­set re­pur­chases pro­gram by EUR 20 bil­lion per month, up from EUR 60 bil­lion per month. This will com­mence in April 2016. The goal of this pol­icy is to flood the mar­ket with greater ac­cess to cap­i­tal, to in­crease spend­ing, raise in­vest­ment and al­low in­fla­tion to grad­u­ally rise. Presently, one of the ma­jor prob­lems with the Euro­pean econ­omy is de­fla­tion and Mario Draghi is in­tent on us­ing all avail­able re­sources to com­bat this prob­lem.

- On Wed­nes­day, 16 March – the same day as the Fed an­nounces its in­ter­est rate de­ci­sion – the ECB will im­ple­ment a 10-ba­sis point de­cline in the de­posit rate to 0.40%. Neg­a­tive rates are al­ready in ef­fect in coun­tries like Ja­pan, Switzer­land and Den­mark, and the goal is to dis­cour­age com­mer­cial banks from ‘park­ing’ ex­cess funds with the cen­tral bank. The the­ory is that banks will then make ad­di­tional funds avail­able to bor­row­ers, thereby spurring eco­nomic ac­tiv­ity.

- The Re-Fi rate of the Eurosys­tem will de­cline by 5-ba­sis points to 0% as from 16 March, 2016.

- 4 long-term Re-Fi op­er­a­tions known as (TLTRO II) with 4-year ma­tu­ri­ties will be op­er­a­tional within 3 months. The ECB an­nounced that bor­row­ing con­di­tions on th­ese TLTRO II op­er­a­tions will be as low as the pre­vail­ing in­ter­est rates at the de­posit fa­cil­i­ties.

- Also on Wed­nes­day, 16 March the rate on the MLF (Marginal Lend­ing Fa­cil­ity) will de­cline by 5-ba­sis points to a level of 0.25%.

- Among oth­ers, in­vest­ment-grade bonds (de­nom­i­nated in euros) which are is­sued by non-bank cor­po­ra­tions in the Euro­pean eco­nomic area will also be in­cluded in the avail­able as­sets that will be el­i­gi­ble for reg­u­lar pur­chases by the ECB. Mario Draghi a while back when he said he would use all pow­ers at his dis­posal to pre­vent the col­lapse of the euro and of the Euro­pean econ­omy. Sev­eral years ago, Draghi said the fol­low­ing: ‘Within our man­date, the ECB is ready to do what­ever it takes to pre­serve the euro. And be­lieve me it will be enough.’ Back in 2012 at the height of the debt cri­sis, Mario Draghi promised to do ‘what­ever it takes’ to save the eu­ro­zone from col­laps­ing. There is a great de­gree of sen­si­tiv­ity vis-a-vis the eco­nomic re­al­i­ties and chal­lenges of the re­gion. Even though Draghi made the com­ment about not an­tic­i­pat­ing fu­ture rate hikes, the truth is that the ECB will do what­ever is needed if eco­nomic con­di­tions war­rant ad­di­tional ac­tion. If growth tar­gets and the tar­geted 2% in­fla­tion rate are not be­ing at­tained, the ECB will act. The big is­sue how­ever is pre­cisely how ef­fi­ca­cious cen­tral banks are nowa­days when it comes to deal­ing with ma­jor eco­nomic crises.

The re­cent eq­ui­ties rout that has rocked ma­jor av­er­ages around the world is due in no small part to the loss of con­fi­dence in cen­tral banks. Traders, in­vestors and fi­nan­cial an­a­lysts have all but lost con­fi­dence in the abil­ity of cen­tral banks to stem the eco­nomic rout that is tak­ing place. This re­jec­tion­ist move­ment has man­i­fested it­self in a groundswell of sup­port for anti-es­tab­lish­ment political can­di­dates con­tend­ing the US pres­i­den­tial elec­tions. Can­di­dates like Ted Cruz and Marco Ru­bio have lost sup­port to anti­estab­lish­ment can­di­dates like Don­ald Trump. Much the same is hap­pen­ing on the Demo­cratic side with a rel­a­tive un­known in Bernie San­ders pos­ing a con­sid­er­able chal­lenge to the nom­i­na­tion of Hil­lary Clin­ton as the Demo­cratic front-run­ner. The es­tab­lish­ment rep­re­sents govern­ment and all gov­ern­ing bod­ies, and the pop­u­lace is quickly tir­ing of their abil­ity to ef­fec­tively deal with the so­cio-eco­nomic chal­lenges faced around the world. It is for th­ese rea­sons that a sharp sell­off in bank­ing stocks took place in Jan­uary and Fe­bru­ary 2016. low for a pe­riod of time. The ECB chief be­lieves that this is a nec­es­sary con­di­tion to main­tain, since the Euro­pean eco­nomic area growth ap­pears to have a strong neg­a­tive bias. It is in­ter­est­ing to point out that the in­ter­est-rate de­ci­sions in the 6 points listed by the ECB will come into ef­fect on the same day that the Fed will be an­nounc­ing its in­ter­est-rate de­ci­sion.

The cur­rent rate in the US is 0.50%, and while there is a 0% like­li­hood of a rate hike at this junc­ture (ac­cord­ing to mar­ket an­a­lysts) the tim­ing of the ECB an­nounce­ments is cu­ri­ous. The Fed and the BOJ will be an­nounc­ing their mon­e­tary poli­cies this com­ing week, and like it or not, cen­tral banks in the Bank of Ja­pan, Euro­pean Cen­tral Bank, Fed­eral Re­serve Bank, Bank of Canada and the Bank of Eng­land re­main the ma­jor driv­ers of eco­nomic ac­tiv­ity in the global econ­omy. The out­come of the March 15/16 FOMC meet­ing of the Fed is al­ready known; what isn’t known is what the min­utes of the meet­ing will say – the state­ment that fol­lows.

That is the nugget that traders will be act­ing on as it gives an in­di­ca­tion of what the Fed is likely to do in up­com­ing meet­ings.

As for the Bank of Ja­pan, no sur­prises are ex­pected. And the gov­er­nor of the Bank of Ja­pan re­cently an­nounced that he will not en­force ad­di­tional in­ter­est-rate cuts at this point. There have been sev­eral pos­i­tive de­vel­op­ments tak­ing place in the global econ­omy (in­creas­ing prices of iron ore, crude oil and a rush back to eq­ui­ties) and in the Ja­panese econ­omy will likely stave off any fur­ther talk of de­posit rate de­creases in March 2016.

Pol­i­cy­mak­ers in Ja­pan will want to take a long and hard look at the im­pact of neg­a­tive rates on the Ja­panese econ­omy, no­tably pro­duc­tion and man­u­fac­tur­ing and the ser­vices sec­tor. Since there is a con­sid­er­able time lag be­tween the im­ple­men­ta­tion of poli­cies and the full ef­fect of those poli­cies to work their way through the econ­omy it is still early days.

Pol­icy ex­perts are ex­pect­ing the Bank of Ja­pan to cut rates fur­ther in April if con­di­tions don’t im­prove. For now, it’s all eyes on the ECB and the im­pact of EUR 20 bil­lion ad­di­tional quan­ti­ta­tive eas­ing and a 10-ba­sis point re­duc­tion in the de­posit rate to -0.40%.

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