Mon. Feb 24th, 2020

Draghi shoots slightly below expectations


He hasn't thrown the house out of the window, but he hasn't given birth to a mouse. The ECB has chosen to lower the interest rate for deposits that European entities have in the agency by 10 basis points, from -0.40% to -0.50% and turning the difficult situation with another twist the one that European banks are already dealing with. Weeks ago, before the biggest truces in the commercial war and in Brexit, the markets anticipated a cut of 20 basis points, up to -0.60%. If analyst forecasts are met, the ECB could adopt the level of -0.60% at the December meeting. It was hoped that, to alleviate this punishment, Draghi announced some balm measure for the sector, but in the statement issued by the ECB at 1:45 p.m. there is nothing like that. Perhaps the Italian reserves the comfort for the press conference that is about to begin.

What the announcement also announces is a new debt purchase operation by volume of 20,000 million euros per month, with a duration that could range between 9 and 12 months. Purchases will be made from November 1. Analysts, for example, such as Bank of America Merril Lynch, had discounted that this QE2 would reach a volume of 30,000 million euros per month. By staying below but with little difference from the predictions, Mario Draghi expects the desired effect but still maintaining the tension and leaving the door open to new measures. If Draghi failed to comply now, the euro could skyrocket and, at the same time, the long-term yields of European bonds. Both would be an additional burden for the weak euro economy.

These measures, possibly the last package launched by Mario Draghi, who attends his penultimate meeting of the governing council today and awaiting the imminent arrival of the French Christine Lagarde, must also answer another question no less important: how much power It still has a central bank if it has already greatly eased its monetary policy. Especially since the ECB's balance is already at 4.7 billion euros and could exceed the magic mark of five billion in the future. The size of the measures announced suggests that Draghi has managed to convince a majority in the council that monetary policy can still do something. The still president of the ECB is confident that even lower interest rates and more bond purchases will make a difference, giving a certain boost to inflation, although surely the decision has not been taken unanimously.

In any case, the general vision is that monetary policy cannot do much to counteract the slowdown in growth in Europe and in the rest of the world. A concerted relaxation of fiscal policy is necessary. There is still no consensus in Europe to continue on that path, but at least the Germans have been speaking more openly about this possibility in recent weeks.

It was at the June meeting, when Draghi began preparing the markets for this movement. During his intervention he adopted a more bearish bias on interest rates. Far from containing the expectations of new stimuli that he then unleashed in the markets, his intervention in the Sintra forum (Portugal) multiplied the options for new extraordinary measures in the coming months.

Draghi, in his last speech at the Sintra forum as president of the ECB, stressed that the monetary institution is prepared to use all available instruments to ensure its goal of inflation close to 2%. He said they will not accept a persistently low inflation rate, and added that all options considered to achieve their objective were already discussed during the last ECB meeting, held last June 6.

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