Thursday, October 22, 2015
Draghi increases bets for December action
Back to back with one of Malta’s biggest casinos, the ECB today clearly increased its bets, sending strong hints on new monetary stimulus at the December meeting. While no decision was taken today, the ECB’s sounded more concerned about the growth outlook for the Eurozone and signaled its willingness to act. According to ECB president Draghi, some members of the Governing Council were already willing to act today. As regards the macro-economic assessment, the ECB voiced more concerns about the growth outlook. Back in September, market turmoil and the slowdown of China and emerging markets were still too fresh to be integrated in the ECB’s projections. Today, the ECB singled exactly these factors out as the main risk for the Eurozone economy. To be precise, the ECB warned that “concerns over growth prospects in emerging markets and possible repercussions for the economy from developments in financial and commodity markets continue to signal downside risks to the outlook for growth and inflation. Most notably, the strength and persistence of the factors that are currently slowing the return of inflation to levels below, but close to, 2% in the medium term require thorough analysis.” Against the background of increased concerns about growth, and related second-round effects on inflation, ECB president Draghi opened the door to more monetary stimulus in December. In this regards, the key statements at today’s press conference were “the degree of monetary policy accommodation will need to be re-examined at our December monetary policy meeting” and that the ECB already today had a “rich discussion and was “open to a whole menu of monetary policy instruments”. Draghi remarked that the ECB had tasked several committees to work on the implementation of possible instruments. He called this a “work-and-assess” stance. Finally, Draghi also mentioned a lowering of the deposit rate as a possibility for future action, even though back in 2014 he had announced that interest rates had reached the lower bound. Obviously, it is hard not to see the ECB’s intention to add more monetary stimulus. Still, the ruthlessness with which Draghi sometimes tried to defend the ECB’s position was a bit surprising. In fact, the ECB is still only one third into its envisaged QE purchases and the discussion on whether low (or even negative) inflation rates are now a curse or a gift for the Eurozone remains unclear. Furthermore, it is also far from certain that the marginal gains from stepping up QE are still positive. Judging from the immediate market reaction, stepping up QE should at least weaken the euro somewhat. In our view, probably the biggest and most important goal of the ECB as it would deliver almost instant success. Even though Draghi repeated the ECB’s well-known position that the exchange rate was obviously not a policy target for the ECB. All in all, Draghi has been more explicit than we had expected. The door for more monetary stimulus is wide open and does not necessarily have to be more QE. It could also be a lower deposit rate, maybe even fx interventions or purchases of other assets (previously excluded). Draghi’s u-turn on the lower bound of interest rates has made him walk in the footsteps of former German chancellor Adenauer who once said “why should I care about my chatter from yesterday”. So everything is possible. In our view, the main triggers for more action in December will be the ECB’s staff projections, particularly the headline and core inflation forecasts for 2017. Even though market participants should know from recent experiences with the Fed that crucial and groundbreaking decisions can be postponed more often than markets believe, it will be hard for the ECB not to deliver in December. Maybe inspired by the casino next door, the ECB today increased its bets. The ECB has to have strong cards, because it will have to show its hand in December.