Nima

Director of Client Relationships
Responsible for the management & development of the easyMarkets client base as well the development of our IB partner program.

Last week, the European Central Bank (ECB) announced a major shift in monetary policy that gave investors mixed signals about the future.

 

The ECB has agreed to slash its monthly bond-buying program to €30 billion from the previous pace of €60 billion. In doing so, policymakers said the stimulus program will likely continue beyond the previous deadline of September 2018. Central bank president Mario Draghi affirmed that the ECB could increase the size of the purchase program if the Eurozone economy shows signs of weakness.[1]

 

As expected, policymakers left the deposit rate at -0.4% and the main refinancing rate at zero.

 

“The economic expansion in the eurozone continues to be solid and broad-based,” Draghi said, hailing “unabated growth momentum.”[2]

 

The Eurozone economy has been one of the most pleasant surprises of 2017. The euro area economy expanded 0.6% in the second quarter, following a 0.5% expansion in January-March. Growth is forecast to remain robust as Germany and the periphery continue to make solid gains.

 

That being said, the likelihood of a bond-buying extension sent the euro reeling last week. The euro-dollar exchange rate plunged more than 200 pips following the decision to trade in the low 1.16 US region. Prices were down half a percent at the start of Monday’s session.

 

Despite the recent loss, the euro has put up strong gains all year long on a slumping dollar and rebounding regional economy. The ECB’s decision is intended to be a gentle exit from quantitative easing, probably to avoid upsetting the market too much. Policymakers are not expected to make any further changes for the rest of the year.

In tightening monetary policy, the ECB joins a small handful of other central banks determined to return to normalcy. However, the ECB is not in any position to start raising rates until inflation shows meaningful progression toward the 2% target.

 

 

[1] Will Martin (26 October 2017). “The ECB announced ‘a sea change but a very gentle one’.” Business Insider.

[2] Tom Rees (26 October 2017). “ECB slashes stimulus programme in major policy shift; Barclays sinks on ‘difficult’ quarter.” The Telegraph.

[3] European Central Bank. Schedules for the meetings of the Governing Council and General Council of the ECB and related press conferences.

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