By the ECB´s decision to remove the explicit pledge to buy more assets if necessary the pledge to keep on buying assets on monthly basis remained. The change in the ECB statement is a hawkish tweak although the ECB President tried to downplay it during the press conference. The fast is that the ECB Governing Council dropped the part of the forward guidance in its statement in which it says that it stands ready to increase the asset purchase programme in terms of size and/or duration.
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In line with our expectation, the ECB removed their pledge to stand ready to increase the volume if the outlook becomes less favourable. Draghi emphasised the improved economy and the change in language is a natural step to the forward guidance. Recall that this wording has been used since December 2016, when they adjusted the purchase rate from EUR80bn to EUR60bn, at a time when the economic outlook was worse than now (core inflation around 0.8-0.9% and quarterly growth rates around 0.4-0.5% back then).
At today’s monetary policy meeting there were no changes in the ECB’s monetary policy stance, as the central bank left key interest rates unchanged and reiterated that asset purchase programme (APP) will continue to run at a monthly pace of EUR30bn until September 18 or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim.
January ECB meeting review
While there were many questions concerning the recent strength of Euro from rather a low number of journalist participating, at least compared to times when I was regular ECB press conference participant a few years ago, there was no straightforward answer of Draghi style that we know from previous press conferences for years. Draghi opted to hide his comments on the recent strength of Euro behind secrets of agreement done back in October of last year on the communication of officials with market participant agreed with the IMF.
The ECB have left rates and its APP on hold as was widely expected by the markets. However this has not stopped the Euro rallying with EURUSD breaking above the 1.2500 level, and EURGBP breaking above the short-term resistance at 0.8730.
At its monetary policy meeting held today, the Governing Council of the European Central Bank (ECB) decided to maintain status quo and leave key benchmark interest rates unchanged.
what is the ECB?
The European Central Bank is the central bank empowered to manage monetary policy for the Eurozone. With its beginnings in Germany 1998, the ECB is empowered to maintain price stability in the euro area, so that the euro’s purchasing power is not eroded by inflation. As an entity independent of individual EU countries and EU institutions, the ECB aims to ensure that the year-on-year increase in consumer prices is less than, but close to 2% over the medium term. Another of its tasks is the one of controlling the money supply. This involves, for example, setting interest rates throughout the euro area. The European Central Bank’s work is organized via the following decision-making bodies: the Executive Board, the Governing Council and the General Council. Mario Draghi, member of the Executive Board, is also the President of this organism. His speeches, statements and declarations are an important source of volatility, especially for the Euro and the currencies traded against the European currency.
who is ECB's President?
Mario Draghi was born in 1947 in Rome, Italy. Graduated of the Massachusetts Institute of Technology, he became President of the European Central Bank in 2011. Draghi gives press conferences in the back of how he observes the current European economy. His comments may determine positive or negative trends for the Euro in the short-term. Usually, a hawkish outlook is seen as positive/bullish for the EUR, while a dovish one is seen as negative/bearish.
How to Trade the ECB Rate Decision
Prior to the Rate Decision:
- Many traders buy the rumors and square their positions shortly after the decision is made. For instance, if the market believes that the European Central Bank will hike the rate; traders buy the Euro and close the position shortly after the announcement. On the other hand, if the expectation is a rate decrease, traders will short the Euro and square the position after the announcement.
After the Rate Decision:
- If the market’s expectations differ from the actual rate decision there can be some excellent trading opportunities.
- If the market is expecting a rate hike, but the European Central Bank ends up cutting the interest rate, a short 1-2 hour trade selling the Euro may prove successful.
- If the market expects a rate cut, but the ECB comes in with an increase in the rate, a trader may want to place a short long position on the Euro for 1-2 hours.
hike, low or mantain interest rates
The decision always has an effect on the Euro.
When the interest rate is increased the European Central Bank is literally selling government securities to large financial firms. In turn, the financial organizations are paying in Euros for these securities. This effectively decreases the amount of currency circulating in the economy. A decreasing supply leads to higher demand, and therefore causes the value of the Euro to appreciate.
When the interest rates are decreased, the European Central Bank floods the market with Euros. This is done by the purchasing government securities from financial organizations. In return for the securities, these banks and financial deals are paid in Euros, therefore increasing the supply of Euros in the economy. As supply increases, the value of the Euros depreciates.
the world interest rates table
The World Interest Rates Table reflects the current interest rates of the main countries around the world, set by their respective Central Banks. Rates typically reflect the health of individual economies, as in a perfect scenario, Central Banks tend to rise rates when the economy is growing and therefore instigate inflation.
concepts you need to know
In practical terms, QE means that central banks create money out of nothing to buy securities, such as government bonds. This new money swells the size of bank reserves by the quantity of assets purchased and that’s why this programme is called Quantitative Easings. The money supply is intended to flood financial institutions with capital in an effort to stimulate lending and increase liquidity.
Much of the governments’ debt is held by banks in the Eurozone and the ECB wants them to give more credits. If the European Central Bank buys government bonds, their prices rise and profitability drop even more. This is a liquidity-providing operation that weakens the value of the euro. This depreciation makes European exports cheaper and competitive, and ultimately, helps in recovering. In addition, as a result of the stimulus to internal and external consumption, the ECB combats the risk of deflation, a widespread and prolonged drop in prices, as well as the high unemployment.
The long term refinancing operation (LTRO) is a cheap loan scheme for European banks that was announced by the European Central Bank towards the end of 2011 in a bid to help ease the eurozone crisis.
Round one was carried out on 21 December, when banks took €489 billion from the European Central Bank. The loans are due to be repaid within three years at a rate of 1%, and a second round will be launched on 28 February, with the results of how much money was requested due on 29 February.
As the eurozone crisis has escalated, banks have become less stable and have less money to lend. The objective of the LTRO is to boost cash flow in the market and avoid a severe credit crunch or collapse of the banking system.