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Will the ECB ever really do QE?
There is an outside chance that the European Central Bank could upstage the normally all important US Non-Farm Payroll figures due this Friday with an announcement over new stimulus measures to combat potential deflationary pressures.
Last week Bundesbank President Jens Weidmann and ECB executive board member left open the possibility that the central bank could engage in quantitative easing to counter deflationary pressures in the Eurozone.
The remarks stunned many in the forex markets as Germany has been implacably opposed to measures such as QE. The ECB doing QE would be a potential game changer sending risk assets and currencies higher and the EUR and safe havens such as JPY lower.
However, an announcement concerning measures such as QE or negative interest rates is unlikely at this Thursday's ECB press conference. Not least because Weidmann qualified his comments over the weekend by saying the Eurozone is not locked into a deflationary spiral and cautioned against over-reacting to what could be cyclical factors.
However, the tantalising possibility of QE has now been put on the table.
Don't hold your breath
Eurozone inflation was 0.5% in March, down from 0.7% in February and is well below the ECB's 2% target. A fall into outright deflation – as has already happened in a few Eurozone states – would see the weight of debt creep up and possibly incentivise consumers to delay purchases in the hope of lower prices in the future. Weidmann does not believe the latter is happening.
However, though Weidmann has created excitement over QE, it is by no means certain that it will ever happen in the Eurozone and if it does it would probably be a last resort after other less controversial measures have been tried.
If OMT is illegal under the ECB's constitution then QE most certainly would be and getting around that would take some deft legal and constitutional footwork.
In the meantime, the ECB would very likely try other measures such as talking the EUR down, negative interest rates or some sort of support for private sector bonds to help push money directly into the real economy to stimulate commercial activity.
Only if none of that worked would the ECB likely try QE. So in other words by the time it did happen, if it ever does, the move will likely have been so well telegraphed to the markets that it would have been widely priced in.
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Eurozone Producer Prices Fall Most Since 2009
Eurozone producer prices declined at the fastest pace since end-2009, reinforcing fears of deflation in the currency bloc.
Industrial producer prices dropped 1.7 percent year-on-year in February, the biggest annual fall since December 2009, data from Eurostat showed Wednesday.
The decline was deeper than the 1.6 percent fall forecast by economists and a 1.4 percent drop posted in January. Prices excluding energy declined 0.5 percent.
Producer prices fell in almost all member states, with the largest decrease of 5.4 percent in Cyprus. Meanwhile, prices rose 1.1 percent in Ireland and 0.3 percent in Malta.
Overall producer prices decreased 0.2 percent from January, when prices slipped 0.3 percent. The producer price index was expected to remain flat in February.
Excluding energy, producer prices remained unchanged, following a 0.1 percent month-on-month rise. Capital goods prices and non-durable consumer goods prices also remained flat.
Cost of intermediate goods slid 0.1 percent, offsetting the 0.1 percent rise in January. Meanwhile, the decline in energy prices slowed to 0.5 percent from 1.2 percent.
Consumer price inflation fell to 0.5 percent in March, a 52-month low. The European Central Bank targets 'below, but close to 2 percent' inflation.
Howard Archer, chief European economist at Capital Economics said it is looking an ever closer call on whether the ECB will take further measures and it is very possible that the bank could act as soon as its April 3 policy meeting.
It is possible that the ECB could end up trimming its refinancing rate from 0.25 percent to 0.15 percent or even 0.10 percent, although Archer has doubts that this will happen.
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European Central Bank decision: Here’s what it could mean for investors
Pressure is mounting on the European Central Bank to fight off low inflation, but don’t hold your breath for the policy decision later on Thursday.
Yes, inflation was at a four-year low in March, but at the same time, other macroeconomic indicators are confirming that the currency union is leaving the financial crisis in the shadows. PMIs are strong, unemployment is a bit lower than expected, and economic growth is picking up — even in some of the weaker euro-zone countries, such as Spain, where the government recently lifted its GDP forecast for 2014.
The $64,000 question ahead of Thursday’s meeting is which way the ECB will lean when it makes its monetary-policy decision. Move to fight off low inflation? Or focus more on the upbeat data? Consensus is for no changes at all — as in no rate cut and no other easing action.
However, most economists have stressed that it’s an extremely close call and it “could be a boy or a girl”, as Mads Koefoed, head of macro strategy at Saxo Bank, put it. At Goldman Sachs, economist Sebastian Graves expects the Governing Council to ease policy modestly, with a small cut in rates and maybe some liquidity actions.
“Such measures will be largely cosmetic from a macroeconomic perspective, but help to avoid giving the impression of an indifference to low-inflation outcomes and a lack of concrete action following much dovish rhetoric,” he said in a note.
There’s been lot of speculation recently about which tools the ECB has left — if any — to boost the euro-zone economy, and some are more straightforward than others. Here’s a rundown of some of the possible outcomes at today’s meeting:
No change: The most anticipated outcome and the decision that should result in the least drama for financial markets. ECB President Mario Draghi has on several occasions pointed out that there are no signs the euro area will fall into deflation, and he said at the March meeting that inflation should soon start to pick up again. That view was echoed by ECB Vice President Vitor Constancio, who said earlier this week that falling consumer prices are unlikely as the economic recovery absorbs spare capacity.
Additionally, macroeconomic data have broadly been favorable over the past month, which should outweigh deflation concerns and keep ECB policy makers in the “no change” camp, according to James Buckley, fund manager at Baring Asset Management.
Expect no major market reaction if this is the case, Buckley said. Instead investors will move on and focus more on the highly anticipated U.S. nonfarm-payrolls data out on Friday.
Rate cut: Not the consensus forecast, but nevertheless a possibility, as also highlighted by Goldman Sachs. Economists at Danske Bank are also leaning toward more easing, expecting a small cut in the refinancing rate to 0.15%. It currently stands at 0.25%, which is a record low.
If the ECB opts for a rate cut, bond yields are likely to move lower, while equity markets should move a leg higher. There’s a caveat, though: with sovereign bond yields already low and European stock markets at multiyear highs, some of the easing excitement could already be factored into prices.
End the sterilization of SMP: This has been touted as a likely move before, but most economists doubt it’ll happen at this point. By ending the so-called sterilization of bond purchases under the Securities Markets Program, the ECB would loosen lending conditions by effectively putting 175 billion euros in additional funds into the euro-zone financial system.
In fact, this move was highly anticipated ahead of the March meeting, but Draghi said at that press conference he “didn’t see any development in the money markets that would lead to that unwanted tightening of monetary conditions that would justify the use of this instrument.”
Quantitative easing: The big bazooka. More and more people are speculating bond buying could be on the cards, after Bundesbank President Jens Weidmann last week radically softened his stance on the unconventional easing measure. Elisabet Kopelman, head of economic research at SEB, explained that money markets are already pricing in some sort of easing from the ECB, with QE one of the most likely options. The meeting on Thursday, however, seems a bit premature for the ECB to go bond shopping, she said.
Expect a rally in most risk assets if the central bank brings QE to the table already in April.
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ECB leaves all rates unchanged again – EUR/USD bounces back up
This time there was no clear consensus about the ECB’s action, but the opinions leaned towards yet another “no-change”: the main lending rate remains at 0.25% and the deposit rate stays at 0%.
EUR/USD was trading at a narrow range between 1.3750 and 1.3770 in the hours before the release. After leaning lower in the minutes before the publication, EUR/USD is now bouncing back up to 1.3777.
Stay tuned for a live blog of Mario Draghi’s press conference soon. The press conference begins at 13:30 GMT. The live blog begins beforehand.
The level of headline inflation fell to 0.5%, the lowest since 2009, but core inflation managed to stay at 0.8%, above the lowest post crisis level of 0.7%.
There was more talk about a possibility of QE, after the Bundesbank seemed to allow for it under certain conditions.
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ECB's Draghi takes swipe at IMF over policy recommendations
European Central Bank President Mario Draghi swatted away suggestions from the International Monetary Fund that his bank should ease monetary policy further on Thursday, questioning the timing of the Fund's most recent comments.
"The IMF has been of recent extremely generous in its suggestions on what we should do or not do, and we are really thankful for that," Draghi told a news conference after the ECB's monthly policy meeting.
"Frankly, I would like the IMF to be as generous as they have been towards us also with other monetary policy jurisdictions, like for example issuing statements just the day before a (U.S. Federal Reserve) meeting would take place," he said.
IMF Managing Director Christine Lagarde on Wednesday called on the ECB to ease monetary policy to move prices higher, saying "lowflation" in advanced economies risked undercutting an already sluggish global recovery.
The ECB left its policies unchanged on Thursday
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Draghi QE "Reflection" Drops Euro, Pops Bonds/Stocks
Despite Draghi's explanation that a QE program in Europe (due to the greater extent of bank lending vs capital market financing) would not be "as efficient" as the Fed's program, his comment that:
Has provided just enough "hope" juice to drive the EUR lower and ramp bond and stock prices across Europe (for now). We will have to see what the half-life of this jawboning is. Of course, the EUR selling is USD buying and that is pumping USDJPY higher - and therefore a pre-open pump in US equities.
EUR slides...
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Draghi: ECB Open to Further Easing
The European Central Bank opened the door Thursday to the kind of dramatic stimulus measures it has long resisted, even as its counterparts in the U.S. and elsewhere are winding theirs down, reflecting mounting fears about threats to Europe's economic recovery.
President Mario Draghi's indication that the central bank discussed negative interest rates and large-scale bond purchases—if needed to keep persistently low inflation from undermining growth—caught financial markets by surprise.
The ECB, as expected, held its main lending rate at the record low of 0.25%, where it has been since November. But the euro weakened at the ratcheting up of the rhetoric concerning the possibility of action as early as next month.
Mr. Draghi said officials had discussed asset purchases, known as quantitative easing, as well as setting a negative rate on bank deposits parked at the ECB—moves that could help bolster the economic recovery and combat worryingly low inflation in the euro zone. The annual rate is just 0.5%, far below the bank's target of just under 2%.
"We don't exclude further monetary-policy easing," Mr. Draghi said at his monthly news conference. He also peppered his comments with much more aggressive language than he has used in recent months.
The ECB is "resolute" in its determination to keep its easy-money policies in place, he said, and "to act swiftly if required."
The ECB's 24-member rate-setting board, which includes Germany's conservative Bundesbank chief, was "unanimous in its commitment to using also unconventional instruments within its mandate in order to cope effectively with risks of a too-prolonged period of low inflation," he said.
After he spoke, Spanish and Italian government bonds extended their recent rallies, with Italy's 10-year bond yields falling to an eight-year low.
A negative deposit rate—it is currently zero—would force financial institutions to pay to park their excess funds at the ECB, which may encourage them to lend more to the private sector. Denmark has deployed negative rates since 2012, but it would be largely unchartered territory for a major central bank such as the ECB.
Mr. Draghi "has elevated the threat level about further action," said Nick Matthews, economist at Nomura International. "I don't think you can be any more dovish without actually doing something," he said. "Dovish" is used to describe central bankers who are more worried about weak growth than they are about inflation.
Mr. Draghi's comments suggest reducing interest rates would be a first step.
Quantitative easing is more complicated in the euro zone than in the U.S., where the Federal Reserve has deployed the policy and continues to do so, albeit at a scaled-back pace. Asset purchases in the U.S. filter quickly to its economy because relatively more borrowing there is done through the capital markets, Mr. Draghi noted.
The Bank of England has accumulated about £375 billion ($622 billion) in government bonds since 2009, but hasn't made any new purchases since November 2012. The U.K. economy has expanded much more vigorously than the euro zone's in recent years, and inflation is significantly higher.
But the euro zone has 18 national bond markets to deal with, making it hard to design a policy for the entire region. And the euro bloc is much more bank-focused than the U.S., meaning that even if the ECB bought private and public debt, this may not be quickly transmitted to the economy.
Still, ECB had a "rich and ample discussion" on quantitative easing and other measures, Mr. Draghi said, and will continue to study it.
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Draghi Seen Forging Different QE Path to Fed
European Central Bank President Mario Draghi’s version of QE might turn out to be rather different to the type deployed by the Federal Reserve.
As ECB officials try to stamp out the risk of deflation, Draghi yesterday gave his strongest signal so far that the ECB is prepared to embrace a policy that has become a byword for large-scale government bond purchases. And yet, the structure of the euro region’s economy means the ECB will also need to find its own approach to quantitative easing.
Draghi is using the QE label as a tool to convince investors that policy makers in the 18-nation euro region are determined to prevent a Japan-style deflationary spiral. At the same time, there are political and economic obstacles to a euro-wide wave of sovereign-bond purchases, and a program aimed at boosting bank lending may prove to be more effective.
“The ECB is likely to be more focused on buying bank loans than on buying government bonds,” said Elga Bartsch, chief European economist at Morgan Stanley in London. “Given the political and legal concerns around purchases of government bonds, we continue to believe that a consensus on buying private-sector assets would be easier to reach.”
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European Central Bank takes wait-and-see approach despite high expectations
This week has been important for the euro. The ECB made their highly anticipated monetary policy announcement, which came after the rhetoric bandied around on negative interest rates a week earlier and calls by the IMF amongst others for the central bank to take action to stave off the threat of deflation.
The ECB announced that they would continue to monitor the situation and take a wait-and-see approach to setting monetary policy. The euro initially bounced, but fell as ECB President Mario Draghi went on to say in his accompanying press conference that inflation risk remained firmly anchored, and expressed that the board were unanimous in their commitment to use unconventional monetary tools in the future should the need arise. He was certainly dovish and made it clear that they “don’t exclude further monetary-policy easing”. EUR/USD snapped lower, through stops, and on to a low of 1.3705.
By Alex Edwards at UKForex, an international money transfer service
In the weeks ahead, markets will be closely scrutinising inflation data from the eurozone, and should the headline print weaker than expectations, it will be difficult for the ECB to refrain from taking action at their next meeting in May.
US Non-Farm Payrolls, too, were released last week. Markets were looking for a rebound in the March employment numbers as the bad weather in the US lifted towards the end of February. The data printed broadly in line with expectations showing that employers added 192,000 jobs to their payrolls in March (vs. expectations for 199,000). The USD weakened a little on the move, but only slightly.
As for the pound, it weakened throughout the week following a series of soft PMIs against expectation. Meanwhile, comments from BoE governor Carney were published in the Northern Echo – he said that he would not rule out an interest rate hike before the general election in May next year. This supported GBP/USD a little during the early part of this week.
Next week, we look forward to UK Manufacturing Production and the BoE Monetary Policy Statement. However, this is likely to be a non-event, with interest rates and QE expected to remain unchanged – unless Carney decides to make some accompanying comments. The US FOMC Minutes are also due, and investors will be keen to get a better gauge of how close the first interest rate hike is and would also appreciate reassurance with regard to their expectations for Fed tapering.
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EUR/USD Forecast Apr 7-11
EUR/USD fell for the third consecutive week. Is this the beginning of a downtrend or just part of a necessary correction? German Industrial Production, trade balance, French Industrial Production, ECB Monthly Bulletin and the G20 meetings are the highlights of this week. Here is an outlook on the highlights of this week and an updated technical analysis for EUR/USD.
The ECB decided on another “no-change” in policy leaving the main lending rate at 0.25% despite multi-year low inflation but the tone was certainly different. Draghi put QE firmly on the agenda and mentioned the exchange rate several times. This rhetoric sent the euro down. The not so impressive US Non-Farm Payrolls was not enough to allow for a recovery
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