Will Mario Get His Wish?

Summary

ECB President Mario Draghi said last week that bank policy makers are “comfortable’ about action to head off deflation and weaken the euro in early June. The bank’s June policy meeting is June 5th. This has often been said before. Mr. Draghi and various officials have, at various times, threatened to enact negative interest rates, end the sterilization of the banks sovereign bond portfolio and launch a quantitative easing like asset purchase program. They have done nothing. It is thought that the Bundesbank and ultimately Angela Merkel have vetoed action, even though the Bundesbank has specifically said ending sterilization would be acceptable. Does the ECB expect that its promise to do something will take the euro lower, perhaps low enough that it can declare that conditions have improved enough to stall yet again? Will the ECB be forced to choose a largely symbolic interest rate cut, but eschew negative rates, because that is the one option it can take on its own? We are in for a few interesting weeks in the euro market. Join us as we examine the ECB’s choices and likely market responses.