The last time the European central bank made a meaningful announcement was back in March, when it decreased interest rates and expanded its asset purchasing programme. But sometimes silence says a lot more than a thousand words.
While the ECB has now maintained for months that it will extend its monthly bond purchases beyond March 2017 “until it sees a sustained adjustment in the path of inflation consistent with its inflation aim”, it is by no means a given that such an extension will take place, said Michael Metcalfe, global head of macro strategy at State Street Global Markets.
“While it will be a long-time before monetary policy begins to tighten, this is the beginning of the end of central bank support for government bond markets. A fact that will not be lost on holders of riskier peripheral sovereign debt, especially given ongoing potential and realised political turbulence in some countries,” he added.
A call for assistance
Eurozone bond yields have already risen from record lows this month after a report by Bloomberg that the ECB was considering winding down its QE programme. Though the central bank president dismissed the source of this report as “someone who didn’t have a clue of what he was talking about and was not involved in the discussions”, markets interpreted the message differently, which was not entirely inconvenient to Mr Draghi. After all, it was a timely reminder to markets that central bank stimulus will not continue forever.
However, for now inflation in the Eurozone remains well below the 2%-target. Therefore, some form of stimulus is likely to remain necessary. As Draghi indicated that an extension of the asset purchasing programme was not discussed during today’s meeting, it looks like the ECB is considering other stimulus options.
With the lack of a yield curve in Europe considered by many as big a problem as the low benchmark interest rates, yield curve control could be the next step for the ECB to take, following on from the Bank of Japan’s example last month. And Draghi’s silence could also be seen as an effort to pressure governments into do their bit to stimulate their economies.
“In order to reap the full benefits from our monetary policy measures, other policy areas must contribute much more decisively, both at the national and at the European level,” Draghi told a press conference.
“The implementation of structural reforms needs to be substantially stepped up to reduce structural unemployment and boost potential output growth in the euro area. Structural reforms are necessary in all euro area countries,” he added.