European Central Bank (ECB) President Mario Draghi’s monetary policy speeches never fail to liven up the euro’s price action and this month’s press conference is no exception. Let’s take a look at the main points of his speech yesterday:
1. Chill pill on the negative deposit rates
Aside from keeping its rates at a record low of 0.25%, the ECB has also decided to stick to its forward guidance and keep monetary policies at their current or lower levels “for an extended period of time.”
Draghi also hinted that while they’re technically able to implement negative deposit rates, or charging banks for parking excess cash in the ECB, the 23-member team isn’t in any hurry to do so. For one thing, no other central bank has done it. There’s also a risk of lowering the banks’ profit margins, which could prevent them from lending more to businesses and consumers.
2. Ditto for the LTRO
Another way for the ECB to jumpstart economic activity is to provide more cash to the banks via its Long-Term Refinancing Operations (LTRO). Unfortunately for the banks, the ECB isn’t too excited over launching another LTRO unless they know that the banks would use their extra capital to lend to more borrowers.
3. Lower inflation expectations
The ECB is somewhat optimistic over the region’s recovery, but it also believes that there will be a “prolonged period of low inflation.” The central bank now expects consumer prices to rise only by 1.1% in 2014, 0.2% lower than its last estimates. Meanwhile, the inflation is estimated to rise by 1.3% in 2015.
Bottom line: Think the ECB is done cutting rates? Think again.
Like the other major central banks, the ECB looks like it’s just waiting for its previous actions to take effect on the economy. Just because the ECB didn’t cut rates this month doesn’t mean that they’re “ready and willing” to do so at the first sign of trouble.
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