What’s all the hullabaloo about ECB announcements?
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%.