Mario Draghi’s latest comments have raised hopes of further stimulus, says Stewart Robertson.
The Federal Reserve’s reticence to pull the trigger and raise interest rates in September has left other central banks around the world in a bit of a pickle. None more so than the European Central Bank (ECB), as witnessed last week. The US central bank’s unexpected decision to leave rates on hold was followed by an equally surprising ratcheting up of the dovish rhetoric from Mario Draghi.
The ECB president warned that the risks to growth and inflation remain tilted to the downside, mainly due to external developments – low oil prices and weak growth in emerging economies – and noted that the central bank will “re-examine its monetary tools” at its next meeting in December, where it will also have a new set of economic forecasts to guide it.
Draghi added that the central bank is not in “wait-and-see” mode but rather in “work and assess” mode. That indeed seemed to suggest further monetary stimulus in the form of lower interest rates is in the offing in December. Whereas previously Draghi appeared to be suggesting rates were as low as they could go, he now seems to be saying there’s more room to cut. His message was reinforced when he admitted some rate setters wanted to act now.
We have for a while doubted that just the one round of ‘quantitative easing’ (QE) would be sufficient in Europe. After all, the United States, Japan and UK have all instigated multiple asset-purchase operations. Furthermore, the ECB’s programme is quite modest by comparison with those of these other three countries.
Nonetheless, we were taken by surprise by the timing of these remarks. For a start, the ECB’s current QE programme is not due to expire until September 2016. Which begs the question why signal the need to do more right now? And in any case, while it is true the economic situation in the euro zone remains fragile, on balance it is continuing to improve, albeit slowly.
Of course it may be the case that Draghi is up to his usual tricks and trying to get the response he’s after merely by threatening to loosen monetary policy. But whether or not he can weaken the euro and boost growth and inflation expectations without actually resorting to further policy easing is questionable.
So somewhat perversely, with the ECB set to meet on December 3 and the Fed sitting down less than a fortnight later, we could be set to see one of the world’s two main central banks hiking rates in the same month we see the other cutting them.
Unless stated otherwise, any sources of all information is Aviva Investors Global Services “Aviva Investors”) Limited as at 27th October 2015. Unless stated otherwise any views and opinions expressed are those of the author and should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested. Aviva Investors Global Services Limited, registered in England No. 1151805. Registered Office: St. Helen’s, 1 Undershaft, London EC3P 3DQ. Authorised and regulated in the UK by the Financial Conduct Authority and a member of the Investment Association.