ECB Meeting – Euro Strength Likely to Dominate the meeting. Today, the Monetary Policy Committee (MPC) will meet in Frankfurt to deliberate on the status of the economy. Tomorrow, at 12:45 PM, (GMT), they will announce their decision on base interest rates and the deposit facility rate. Two hour later, Mario Draghi will hold a press conference.
This meeting comes at an important period for the ECB. The unemployment rate in the region continues to fall with that of Germany leading. Manufacturing is growing and wages are also growing, albeit slowly. In addition, the optimism in the region is at a 10 year high as investors and individuals anticipate a better future.
As the ECB has indicated before, no interest rate hike is expected tomorrow. This is partly because the inflation in the region continues to lag behind the target of 2.0%. In addition, in the last meeting, Draghi said that the stimulus package will continue until September, albeit at a slower rate.
Probably, the most important question for Draghi today will be about the Euro. As you know, the Euro has been on an upward trend in the recent months. The currency is currently near a 3-year high against the dollar, a level it reached lastly in 2014. Recently, it had the biggest daily change against the dollar in three years.
This surge seems to have alarmed some policy makers. Recently, ECB’s Vice President Vitor Constancio said that the currency was so overvalued which would have a negative impact on the already low inflation.
This will not be the first time the ECB has faced a challenge of a weaker Euro. In September, following a period of sustained Euro strength, the ECB initiated talks among the Governing Council about volatility and the need to monitor the uncertainty. This wording led the Euro to start a downward trend against the dollar as shown above. This talk is expected to be there tomorrow.
In addition, this meeting comes as Draghi faces mounting calls from some hawkish policy members. Recently, there has been mounting calls for Draghi to follow the Fed and start normalizing. These calls have been louder in Germany.
Another contentious issue likely to be asked tomorrow will be about the deposit facility rate. As you recall, banks are now paying a 1.4% interest rate on all overnight deposits they make with the ECB. Recently, there have been calls to move from the negative interest rates to a reasonable rate. Most notably, there have been calls for the ECB to follow the Fed’s lead about ending QE and start normalizing.
The policy makers will also address the issue of MIFIID II. As you recall, this month, financial institutions in Europe started implementing these policies. Investors will likely want to know how these policies are doing and what the policy makers think about them.
On a personal level Draghi will be pressed on recent reports that he belongs to a secretive club of corporate banks, the G30. Following a one-year investigation by EUs ombudsman, Draghi was asked to drop out of the secretive club of the Washington-based club which is made of 30 of the largest banks in the world. The watchdog agency believes that the group exerts influence on Draghi and the ECB’s policies. The club is so secretive such that only their leader is known. A secretive and anonymous board of trustees nominates other leaders.