A meeting of the European Central Bank heralded few surprises on Thursday, but added fuel to speculation QE will continue past 2017,albeit in a tempered fashion.
The European Central Bank (ECB) is keeping its monetary policy unchanged, as ECB-president Mario Draghi expressed confidence that inflation in the Eurozone is “converging to our objective”.
While EU leaders unveiled plans for a new €321m state-of-the-art ‘Europa’ Brussels HQ, over in Frankfurt the ECB was building its own foundations for change.
The ECB Governing Council again left monetary policy unchanged when it met on Thursday. It looks like the ECB is buying time to communicate to markets that it’s going to wind down its bond buying programme, albeit in an orderly fashion.
The decision by the ECB to include investment-grade corporate bonds in its asset purchasing programme has led to a spike in issuance and to yields edging even lower. While this market response was anticipated by the central bank, its stimulus efforts threaten the viability of the asset class in the longer term .
Janet Yellen’s Economic Club of New York speech provided a timely reminder that the Fed continues to dictate markets. This contrasts with the waning credibility of her counterparts in Europe and Japan.
The ECB’s latest salvo in the fight against the prospect of deflation was initially met positively by markets. But, a lack of a clear message that the Bank will cut rates further from here sent markets falling again almost as quickly.
ECB President Mario Draghi disappointed markets on Thursday. While the Bank delivered a 10 basis point cut to the deposit rate to an historic -0.3%, and extended the deadline of its asset purchase programme by six months, it kept the main refinancing and marginal lending rates steady at 5 and 30 basis points respectively.
The events of recent weeks could lead investors to draw a stark conclusion; there is no such thing as a ‘safe haven’ in investment terms any more.
Relentless easy monetary policies and short term rates at virtually have kept market volatilities at remarkably low levels. Preparing for the next spike may not be such a bad idea as the effects of central banking measures start to wane.